REG - City of Lon Inv Grp - Final Results
20/09/2022 07:00
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RNS Number : 9255Z City of London Investment Group PLC 20 September 2022
20th September 2022
CITY OF LONDON INVESTMENT GROUP PLC (LSE: CLIG)
("City of London", "the Group" or "the Company")
FINAL RESULTS FOR THE YEAR TO 30TH JUNE 2022
The Company announces that it has today made available on its website,
https://www.clig.com/ (https://www.clig.com/) , the following documents:
- Annual Report and Financial Statements for the year ended 30th June 2022
(the 2022 Annual Report); and
- Notice of 2022 Annual General Meeting (the Notice of AGM).
The above documents will be uploaded to the National Storage Mechanism for
inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) in due course, in
accordance with Listing Rule 9.6.1 R.
The 2022 Annual Report and the Notice of AGM, which will be held on 31st
October 2022, will be posted to shareholders on 23rd September 2022.
The Appendix to this announcement contains additional information which has
been extracted from the 2022 Annual Report for the purposes of compliance with
DTR 6.3.5 only and should be read in conjunction with this announcement.
Together, these constitute the material required by DTR 6.3.5 to be
communicated to the media in unedited full text through a Regulatory
Information Service. This announcement should be read in conjunction with, and
is not a substitute for reading, the full 2022 Annual Report.
SUMMARY
- Funds under Management (FuM) of US$9.2 billion (£7.6 billion) at 30th June
2022. This compares with US$11.4 billion (£8.3 billion) at the beginning of
this financial year on 1st July 2021
- Net fee income was £58.2 million (2021: £52.5 million)
- Underlying profit before tax* was £27.9 million (2021: £26.7 million).
Profit before tax was £23.2 million (2021: £22.2 million)
- Underlying basic earnings per share* were 44.2p (2021: 48.1p). Basic earnings
per share were 36.9p (2021: 39.4p) after an effective tax charge of 22% (2021:
24%) of profit before taxation
- Recommended final dividend of 22p per share (2021: 22p) payable on 4th
November 2022 to shareholders on the register on 30th September 2022, making a
total for the year of 46.5p (2021: 33p), including the special dividend of
13.5p paid on 25th March 2022 (2021: nil)
*This is an Alternative Performance Measure (APM). Please refer to the
Financial Review for more details on APMs.
Tom Griffith said on the results and outlook:
"The past year was a successful one for your Company in the face of the
macroeconomic headwinds. This success resulted from the combined strength of
the merged entity. We enter the new financial year focused on delivering
continued growth driven by strong investment performance and the high quality
of services supporting our institutional and high net worth (HNW) clients.
CLIG remains well-positioned in the current market environment. Our
conservative management style will not change, nor will our investment-led
approach with a view to ensuring strong investment performance for our
clients. We will continue to strengthen the operational and investment
capabilities of the Group by building out the distribution pipeline for
institutional investment and wealth management products. We will also continue
to be selective in identifying potential acquisitions, which we believe will
inevitably appear given the difficult market conditions of the past year."
For access to the full report, please follow the link below:
http://www.rns-pdf.londonstockexchange.com/rns/9255Z_1-2022-9-19.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/9255Z_1-2022-9-19.pdf)
This release includes forward-looking statements, which may differ from actual
results. Any forward-looking statements are based on certain factors and
assumptions, which may prove incorrect, and are subject to risks,
uncertainties and assumptions relating to future events, the Group's
operations, results of operations, growth strategy and liquidity.
For further information, please visit www.citlon.co.uk or contact:
Tom Griffith, CEO
City of London Investment Group PLC
Tel: 001-610-380-0435
Martin Green
Zeus Capital Limited
Financial Adviser & Broker
Tel: +44 (0)20 3829 5000
CHAIR'S STATEMENT
At the start of 2022, it was already clear that global markets faced
challenges from tightening monetary policy and simmering tensions in Eastern
Europe, as noted in my 17th February 2022 interim statement. However, the
Russian invasion of Ukraine just one week later served to magnify dramatically
these headwinds in terms of both intensity and time-scale. The emergence of
open warfare in Eastern Europe and rising geopolitical tensions elsewhere is
prompting a fundamental re-think of strategic planning both in terms of
security and defence arrangements as well as supply patterns of strategic
materials, including energy and food. Arguably, it is the monetary and
inflationary consequences of supply disruptions, rather than overt conflict
that have most troubled global markets in 2022, as evidenced by the 20%+ falls
in most developed markets in the first half of the year. Although the MSCI
emerging market index (MXEF) fell by less than 20% in the period, it has now
fallen by more than 30% since its 2021 high, placing it firmly in bear market
territory. A paradigm shift in US monetary policy in response to the inflation
surge has meant that fixed income markets have provided limited shelter with
the US 10-year Treasury benchmark falling 12% and the 30-year Treasury by no
less than 21% in the year to June 2022.
Despite this plethora of negative news, corporate balance sheets are
relatively healthy as evidenced by the rising level of shareholder
distributions and buy-backs. Should supply bottlenecks ease in the coming
months, there are grounds for a degree of optimism that the surge in price
inflation and monetary tightening will prove to be of limited duration. Once
again, the high level of market volatility has illustrated the benefits gained
from the Karpus merger in 2020 in terms of the diversified revenue base
derived from the transaction and, as always, we view the defensive qualities
of closed-end funds (CEFs) across each of the CLIG strategies as an effective
means to participate in a recovery in markets in due course.
Assets and performance
Inevitably, the marked falls across all market segments have reduced CLIG's
Funds under Management (FuM) with a 19% fall in the year as a whole, nearly
all of which occurred in the second half of the year. Within these figures,
CLIM's FuM fell 23% to US$5.8 billion while KIM's FuM fell by 12% to US$3.4
billion, underlining the defensive nature of KIM's higher exposure to fixed
income markets. Shareholders will appreciate that these figures are due in
large part to matters beyond our control and are mirrored across the asset
management industry as a whole. Importantly, it was pleasing to note that fund
flows improved markedly in the second half of the year as a number of CLIM's
institutional clients chose to increase equity exposure, in contrast to the
withdrawals that occurred during the more buoyant conditions of 2021.
Particularly strong inflows to the International CEF strategy in the second
half of the year mean that this product now accounts for more than 30% of
CLIM's FuM. Across the year as a whole, net Group inflows totalled US$102
million, compared with net outflows of US$752 million in the previous year and
with a resumption of more active marketing opportunities in the post-pandemic
world, we are hopeful that the healthy pipeline will translate into further
inflows in the months ahead.
Relative performance of the main CLIM strategies was impacted in the immediate
aftermath of the Ukraine invasion following a mandatory write-down of all
Russian exposure and a widening of discounts in the CEF universe. More
recently, however, some recovery in relative performance has been achieved as
market volatility returns to more typical levels and we expect that, over
time, strict adherence to our investment process will enable a resumption of
the long-term track record of outperformance. Relative performance at KIM has
again been outstanding with strong outperformance across six of the seven
strategies. Reduced weightings to CEFs at a time of widening discounts, allied
to a shift to the more defensive shorter maturities at a time of rising
interest rates proved key to maintaining KIM's excellent long-term track
record.
Results
Group statutory pre-tax profits rose by 4% in the year ended 30th June 2022 to
£23.2 million (2021: £22.2 million) while underlying pre-tax profits, which
exclude exceptional or non-recurrent items, also rose by 4% to £27.9 million
(2021: £26.7 million). Since results for the prior year included only a
nine-month contribution from KIM, a more accurate year-on-year (YoY)
comparison is provided by earnings per share (EPS). On this basis, fully
diluted statutory EPS fell 6% to 36.4p (2021: 38.8p) and underlying
fully-diluted EPS fell by 7% to 43.7p (2021: 47.4p). Despite the ongoing
competitive pressure on fees in the institutional market-place, the Group's
average revenue margin declined slightly to 73bp (2021: 74bp).
In parallel to the "Ukraine" impact on equity and fixed income markets, the
conflict has also prompted strong capital flows into US dollars, due to its
traditional safe-haven characteristics. The fact that 100% of CLIG's revenues
are earned in US dollars, therefore, provides a significant cushion to
revenues and profits when translated into sterling and represents a useful
hedge against sterling weakness. The benefit of this "hedge" has been reduced
somewhat by the Karpus acquisition, with non-sterling costs rising from 56% to
66% of total operating expenses. Nevertheless an 8% reduction in average
monthly US$ revenues between the three-month period leading up to the conflict
and the three-month period thereafter, was reduced to just a 3% decline when
expressed in sterling terms.
Dividends
Shareholders will have noted from my interim statement a note of prudence with
regard to normal distributions (i.e. excluding special dividends)
notwithstanding a buoyant result for the first half of the financial year.
While a build-up of surplus cash allowed the payment of a 13.5p special
dividend in March, it was already clear at the interim stage that the second
half of the year would be more challenging and events since have certainly
vindicated the earlier caution. In light of this, the Board has declared an
unchanged final dividend of 22p to be paid on 4th November 2022 to those
shareholders on the register at 30th September 2022. Taken together with the
interim payment of 11p, total dividends of 33p for the year (excluding the
special dividend) will be covered 1.13 times by this year's post-tax earnings
or 1.22 times on a rolling five-year average basis, slightly ahead of the
Group's five-year dividend cover policy of 1.2 times.
Board
Shareholders were informed at the interim stage that a full review of Board
composition was underway with a view to meeting (as far as possible) the
requirements of the UK Corporate Governance Code (the Code) in terms of both
independence and diversity. Following this review, led by the Chair of the
Nomination Committee, Jane Stabile, a reorganisation of the Board was agreed,
to take effect from the close of the financial year on 30th June 2022,
involving the resignation of three Executive Directors, Carlos Yuste, Dan
Lippincott and Mark Dwyer, who have joined the new Group Executive Committee
(GEC) to oversee the day-to-day running of both operating companies. CEO Tom
Griffith's report in later pages will provide shareholders with additional
detail regarding the GEC's functions while Jane's Nomination Committee Report
will also address these changes and the ongoing plans for diversity and
inclusion but I am pleased to be able to report to shareholders this
significant progress in our governance architecture less than two years after
the transformative Karpus merger.
I am very grateful to the three Executive Directors for their invaluable
contributions to the Board's deliberations over a number of years as well as
their agreement to a corporate restructuring, which will facilitate our
compliance with the Code in a timely fashion. The devolution of operational
management to the GEC will help streamline decision-making on a day-to-day
basis, while providing clearer demarcation between executive management and an
independent Board.
I am sure that all shareholders will wish to join me in offering a special
thank you to Barry Olliff, CLIG's founder and architect over more than thirty
years. As I said in our April announcement, Barry's laser-like focus on value
to both shareholders and clients lies at the core of CLIG's culture and
permeates everything we do for all stakeholders. Barry's willingness to
challenge entrenched orthodoxy in the investment universe is well recognised
and represents a hugely positive long-term legacy. The issue of founder
succession is fraught with challenges and can often be a disruptive process
but thanks to Barry's support throughout the management transition, I am
pleased to report that it has been seamless. On behalf of the Board and all
our shareholders, I would like to say a heartfelt thank you to Barry and wish
him the very best in his well-deserved retirement.
ESG
One of the positives arising from the COVID-19 pandemic was the acceleration
in the use of technology to drive reductions in the environmental impact of
business and CLIG has been active in capitalising on the gains to be realised
in this important area. Inevitably, a network of six offices across three
continents meant that, historically, air travel was a significant component of
CLIG's otherwise low carbon footprint. The decision to streamline CLIG's
office network this year, therefore, with the closure of the Seattle and Dubai
offices, has helped reduce CLIG's carbon footprint materially. Similarly, an
increase in client briefings via video conferences and additional investment
in technology solutions has enabled greater use of video conferencing for
internal communication and meetings.
A concerted effort to reduce paper usage using web-based alternatives for the
Annual Report, portfolio reports and other research-based publications is
helping reduce the Group's waste output and the Group remains committed to
further reductions in our environmental impact wherever possible.
Many commercial businesses have had to adjust to new working practices in the
post-COVID world and CLIG is no exception. The necessity of remote working
during the pandemic provided a template for potential longer term solutions
and to that end, a hybrid "work-from-home" (WFH) policy for all employees has
been implemented. Group-wide policies have also been established on a range of
social issues, including anti-slavery, human trafficking, anti-corruption,
bribery and health and safety, while all employees will receive two training
sessions on diversity, equity and inclusion (D/E/I) in the course of calendar
year 2022. We regard these initiatives as central to the goal of good
corporate citizenship and will continue to encourage the widest possible level
of employee awareness in the social dimension.
Since the appointment of Prism Cosec Ltd as Corporate Secretary in 2021 and
the formation of the Corporate Governance Working Group (CGWG), a series of
changes have been made to CLIG's working practices and these are detailed in
the Governance section of this report. Alongside the measures taken for
Board-level Code compliance detailed earlier, a programme of regular
engagement with employees has been established with video conference meetings
across all offices. These meetings provide employees with the opportunity to
raise any issues with Board members but they also give Independent
Non-Executive Directors the ability to gain greater insight into the
organisation at all levels, thereby assisting them in their oversight role.
Outlook
Over the course of the last two years, we have witnessed extreme volatility in
capital markets and with the threat of long-term conflict in Europe and
double-digit inflation ever present, it would be foolish to paint too
optimistic a picture for the year ahead. Nevertheless, at the risk of sounding
"glass-half-full", I believe there are some early signs of a more stable
market environment. The economic dislocation created by reduced energy and
food supplies together with supply bottlenecks in industry will take time to
be fully resolved but, just as the pandemic forced technological change in a
condensed time-frame, so economies and companies will develop alternative
trade patterns over time. While it appears unlikely that we will see the
"V-shaped" bounce that followed the 2020 COVID-19 lockdowns, central bankers
and businesses alike can see that the current constraints are largely
supply-driven and not permanent in nature. Since markets look well beyond the
near horizon, and provided geopolitical friction does not proliferate beyond
the existing conflict, there are grounds to support the view that the July
2022 "mini-bounce" may not be a flash in the pan.
Irrespective of the macro-economic outlook, the CLIG business model, focused
on value-orientated CEFs and encompassing a mix of institutional and wealth
management clients, is stronger than in previous periods of difficult markets.
Furthermore, bear markets also bring opportunities, be it in the investment
universe or the asset management industry more generally and, with this in
mind, we continue to view the future with cautious optimism. Finally and most
importantly, I would like to thank all of our employees for their continued
and sustained efforts in helping us navigate another challenging year with
typical dedication, loyalty and commitment.
Barry Aling
Chair
15th September 2022
CHIEF EXECUTIVE OFFICER'S STATEMENT
Stronger together
The past year was a successful one for your Company in the face of the
macroeconomic headwinds outlined in Barry Aling's comprehensive Chair's
Statement. This success resulted from the combined strength of the merged
entity for reasons which will be detailed below. We enter the new financial
year focused on delivering continued growth driven by strong investment
performance and the high quality of services supporting our institutional and
high net worth (HNW) clients.
A number of headwinds confronted us during the past year. In addition to
pandemic-related quarantines, labour shortages and supply-chain disruptions,
the outbreak of war in Ukraine in February 2022 led to steep declines in
global stock and bond markets while causing the US dollar to soar as a haven
asset.
To illustrate the extent of the market falls over the year ending 30th June
2022, the US bond market, as measured by the Bloomberg US Aggregate Bond
Index, had its worst twelve-month period since 1976. Further, and for the
first time in over 20 years, all eight main asset categories managed at the
Group's two subsidiaries delivered negative annual returns.
As a result of the Karpus Investment Management (KIM) merger your Company now
demonstrates a dramatically more diversified asset base, with 40% of Funds
under Management (FuM) in Emerging Markets (EM), down from 69% at the point of
the merger, along with significantly reduced volatility in the earnings
stream. The reduction of EM-specific risk to shareholders is a significant
benefit of the merger and supports the dividend policy of the Company.
Through the merger, our commitment to our Clients and their Consultants was
that the investment teams would not be impacted by corporate changes in order
to safeguard our well-honed investment processes. This stability of people and
process is critical to both institutional investors and HNW clients.
Equally importantly, our expanded group of colleagues at CLIG see
opportunities for career growth within the Group as new opportunities arise.
We anticipate that more such opportunities will arise as we continue to
conservatively build upon sharing services across the subsidiary companies.
The past financial year demonstrates why diversification has been prioritised.
Executive management will continue to evaluate opportunities for consideration
by your Board.
FuM & flows
FuM as at 30th June 2022 was US$9.2 billion, which is a 19.4% decrease over
the financial year, reflecting weakness in the underlying asset classes.
While it is difficult to tout the importance of diversification after a year
when both fixed income and equity markets fell, the smaller decline in fixed
income relative to EM equities is a good reminder that diversification remains
beneficial, and that CLIG shareholders receive exposure to a broad variety of
asset classes. This broad asset class exposure was achieved after years of
organic growth within City of London Investment Management (CLIM), and
bolstered by the KIM merger in October 2020, as shown in the table below.
CLIG - FUM by line of business (US$m)
CLIM 30 Jun 2019 30 Jun 2020 30 Jun 2021 30 Jun 2022
US$m % of CLIM total* US$m % of CLIM total* US$m % of CLIM total % of CLIG total US$m % of CLIM total % of CLIG total
Emerging Markets 4,221 78% 3,828 69% 5,393 72% 47% 3,703 64% 40%
International 729 14% 1,244 23% 1,880 25% 17% 1,812 32% 20%
Opportunistic Value 233 4% 256 5% 231 3% 2% 193 3% 2%
Frontier 206 4% 175 3% 13 0% 0% 9 0% 0%
Other/REIT 7 0% 9 0% 13 0% 0% 74 1% 1%
CLIM total 5,396 100% 5,512 100% 7,530 100% 66% 5,791 100% 63%
KIM 30 Jun 2019 30 Jun 2020 30 Jun 2021 30 Jun 2022
US$m % of KIM total* US$m % of KIM total* US$m % of KIM total % of CLIG total US$m % of KIM total % of CLIG total
Retail 2,291 67% 2,401 69% 2,804 72% 24% 2,419 70% 26%
Institutional 1,105 33% 1,087 31% 1,115 28% 10% 1,014 30% 11%
KIM total 3,396 100% 3,488 100% 3,919 100% 34% 3,433 100% 37%
CLIG total 11,449 100% 9,224 100%
*Pre-merger
CLIG had net inflows during the financial year, despite a challenging market
environment. At CLIM, the International (INTL) strategy has been the main
driver of inflows during this financial year after re-opening to new clients
earlier in 2022. The INTL strategy has now seen net inflows for five of the
last six financial years.
KIM had net outflows for the financial year, as their primarily HNW client
base reduced exposure to markets given the higher volatility, especially in
the second half of the financial year.
Net outflows at CLIM's flagship EM strategy continued. As the table below
shows, CLIM's EM strategy has now had net outflows for each of the last four
financial years, despite strong relative performance for the majority of this
period. The geopolitical concerns that have arisen in EM countries, including
Russia/Ukraine, North Korea/South Korea, and China/Taiwan, have given some
investors pause, despite attractive valuations and wide discounts. The
underperformance of EM vs Developed equities over the past ten years, shown in
the chart on the following page, has also had a negative effect on investor
sentiment towards the asset class. EM equities as shown by the MSCI EM Index
have significantly lagged two widely used proxies of Developed Market
equities: 1) The US market, as shown by the S&P 500 Index, and 2) Non-US
Developed Markets, as shown by the MSCI World Ex-US Index. While the US market
has driven overall Developed market outperformance, non-US markets have also
outperformed their EM peers.
Net investment flows (US$000's)
CLIM FYE Jun 2019 FYE Jun 2020 FYE Jun 2021 FYE Jun 2022
Emerging Markets (183,521) (279,459) (275,493) (315,770)
International 252,883 551,102 (14,145) 452,554
Opportunistic Value 48,236 45,914 (102,663) 617
Frontier (21,336) 16,178 (168,843) (4,748)
Other/REIT 6,000 4,600 - 79,133
CLIM total 102,262 338,335 (561,144) 211,786
KIM FYE Jun 2019 FYE Jun 2020 FYE Jun 2021* FYE Jun 2022
Retail 33,701 26,323 (104,222) (106,444)
Institutional 9,050 (67,087) (130,911) (3,302)
KIM total 42,751 (40,764) (235,133) (109,746)
*Includes net investment flows for Retail - (24,407) and Institutional -
(20,264) pertaining to period before 1st October 2020 (pre-merger)
The investment and business development reviews below further explain factors
impacting global equity and fixed income markets over the period.
Business integration update
Your management team spent the past financial year continuing the integration
of the KIM business via projects in Finance, Operations, Information
Technology, and Marketing. An updated version of KIM's website was rolled out
in October 2021 to improve the client experience. The Group is benefiting
directly from sharing services across Finance and Information Technology
departments. We intend to continue to develop synergies as appropriate.
Group's financial results
The Group's average net fee margin for the year was 73bp (2021: 74bp). The
Group's net fee income over the period was £58.2 million. Coupled with the US
dollar strengthening versus sterling throughout the year from 1.39 to 1.21,
Group earnings were buoyed by a full year of KIM fee income which is 100% US
dollar denominated.
CLIG profitability, cash and dividends
Operating profit before profit-share, EIP, share option (charge)/credit and
investment gains/(losses) grew by 7.7% to £38.4 million (2021: £35.6
million) primarily as a result of full year results for KIM in FY 2022 as
against nine months (since merger) in FY 2021. Profit before tax increased to
£23.2 million (2021: £22.2 million). Please refer to the Financial Review
for additional financial results.
The Board has recommended a final dividend of 22p per share (2021: 22p),
subject to approval by shareholders at the Company's Annual General Meeting to
be held on 31st October 2022. This would bring the total dividend payment for
the year to 46.5p, including the special dividend of 13.5p paid in March 2022
(2021: 33p, special dividend nil). Rolling five-year dividend cover, excluding
the special dividend equates to 1.22 times (2021: 1.29 times) in line with our
target. Please refer to page 22 of the full report for the dividend cover
chart, which provides an overview of our dividend policy.
Inclusive of our regulatory and statutory capital requirements, cash in the
bank was £22.7 million as at 30th June 2022 as compared to £25.5 million at
30th June 2021, in addition to the seed and other own investments of US$9.1
million (£7.4 million) (2021: US$5.8 million (£4.4 million)). Our cash
reserves will allow us to continue managing the business conservatively
through volatile markets while following our dividend policy. The CLIG Board
continues to review the appropriate cash reserves needed to run the larger,
but more diversified business, and assesses variables such as the impact of
future revenue projections in case of a broad retreat in underlying asset
prices.
A review of CLIG's Share Price KPI can be found on page 23 of the full report.
Over the past five years, the average annualised return to shareholders is
9.2%, within the 7.5% - 12.5% target range.
EIP
The Employee Incentive Plan (EIP) continues to be an integral part of our
remuneration package in order to align employee and shareholder interests.
This is highlighted by the ongoing take-up by employees across the Group who
continue to benefit from 1) being part of, and 2) owning, a public company. As
at 30th June 2022, CLIG employees owned 7% (2021: 6.4%) of CLIG's issued share
capital.
Corporate Governance & Stakeholders
As Barry Aling stated in his Chair's statement, on 26th April 2022 our Board
announced the restructure of the CLIG Board, and the creation of the Group
Executive Committee (GEC) to provide executive oversight of the Group's
operating businesses, CLIM and KIM.
The GEC is comprised of myself, as CEO, Carlos Yuste (Head of Business
Development), Mark Dwyer (Chief Investment Officer - CLIM), Dan Lippincott
(Chief Investment Officer - KIM), and Deepranjan Agrawal (Group Chief
Financial Officer). Simply stated, the GEC is responsible for the management
and oversight of Group operating activities, including the executive
management of CLIG's subsidiary companies. Each member of the GEC is
responsible for reporting directly to the CLIG Board, and may participate in
CLIG Board presentations and discussions as necessary. One of our goals over
the past two financial years was to determine how to best become compliant
with Provision 11 of the UK Corporate Governance Code, and this restructuring
allows us to achieve that objective.
The CLIG Board was helped directly from the skills, expertise, and
on-the-ground oversight by the Executive Directors during the pandemic, when
travel and in-person engagement was limited. With pandemic-related
restrictions lifting, we have more recently benefited from opportunities for
Board members to meet CLIG employees in-person in London (October 2021),
Coatesville (April 2022), and Rochester (July 2022) at off-site events. You
can find additional details on the Board's engagement with stakeholders in our
Section 172 (1) statement, on page 40 of the full report.
Cybersecurity update
Information Security remains a critical area of concern within the financial
services industry. In the US, the Securities Exchange Commission (SEC) is
increasingly focused on data issues, recently proposing new regulations
governing cybersecurity and data privacy and protection designed to improve
the industry's ability to respond to threats. Each year, the number of
cybersecurity attacks and breaches increases.
To best position CLIG's defences against potential threats, the Group
undertook an assessment with a leading organisation in the Information
Security industry to gauge our overall cybersecurity framework. This follows
an ongoing multi-year effort to bolster our internal systems, controls and
procedures, inclusive of penetration testing, employee training, and threat
detection.
We received an above average assessment of our programme based on the size of
our organisation within the financial services industry. We also received
several suggestions to further strengthen our defences mainly based on
reporting and incident response protocols. Efforts are underway to implement
changes designed to further strengthen the Group's programme. We are focused
on constant improvement, and we are committed in our approach to safeguarding
the Group's data and infrastructure from criminal attacks.
Retirement of CTO
CLIG's Chief Technology Officer, Alan Hoyt, retired on 30th June 2022. Over
his tenure at CLIG, Alan guided the development of our global infrastructure
and the related implementation of systems, applications and data sharing
necessary in a continuously evolving technology environment. Alan's transition
includes a six-month post-retirement consultancy arrangement with CLIG. We
wish Alan the best of luck in his retirement, and extend our gratitude for his
work on CLIG's IT and Cybersecurity efforts over the past 12+ years. Matt
Szoke was promoted to the Head of IT role on 1st July 2022.
Environmental reporting update
The Taskforce on Climate-Related Financial Disclosures (TCFD) developed
guidance in relation to consistent climate-related financial disclosures. CLIG
welcomes the TCFD recommendations and have included our report on page 38 in
alignment with them.
Retirement of Barry Olliff, CLIG Founder
Finally, with CLIG Founder Barry Olliff's retirement from the Board on 31st
July 2022, I'd like to extend my thanks and appreciation for his work on
behalf of all stakeholders. Specifically, Barry's counsel as the Founder and
long-time CEO has been invaluable during the management transition. Barry's
passion for the business, and clear eye towards the future growth
opportunities via diversification, are woven into the culture of CLIG, and
will continue into the future.
CLIG outlook
CLIG remains well-positioned in the current market environment. Our
conservative management style will not change, nor will our investment-led
approach with a view to ensuring strong investment performance for our
clients. We will continue to strengthen the operational and investment
capabilities of the Group by building out the distribution pipeline for
institutional investment and wealth management products. We will also continue
to be selective in identifying potential acquisitions, which we believe will
inevitably appear given the difficult market conditions of the past year.
Tom Griffith
Chief Executive Officer
15th September 2022
INVESTMENT REVIEW - CLIM
Our focus on exploiting discount volatility has served clients well for over
thirty years in both bull and bear markets.
Risk assets fell over the twelve-month period ending 30th June 2022 as
elevated US valuations met sharply higher interest rates, reducing the value
of future cash flows. Most risk assets declined in a relatively correlated
manner, reducing the benefits of diversification.
Active equity managers generally struggled to outperform over the period. In
CLIM's case this was noticeable through weaker net asset value (NAV)
performance at the underlying closed-end funds (CEFs) - and particularly
visible in the International (INTL) CEF Strategy (underperformed by 4.2%) as
the funds we own in aggregate had a bias to smaller, higher growth equities.
In the core Emerging Market (EM) strategy (underperformed by 2.4%) a modest,
long held overweight to Russia was negative as Russian equities were marked to
zero. Discounts generally widened over the period, particularly for the INTL
CEF strategy as retail investors, typically the marginal CEF buyer, turned
cautious after a decade of strong returns. CLIM's smaller strategies
Opportunistic Value (OV) and Frontier had a mixed year - OV suffered from the
same NAV underperformance trend as the INTL strategy and ended the year 2.6%
behind benchmark. The Frontier strategy outperformed by 8.2% with good returns
from country allocation and NAV performance.
CLIM's REIT team delivered another year of solid relative performance. The
strategy, which incepted in January 2019, ended the period with a strong
three-year track record which bodes well for asset growth in the medium term.
Unfortunately the EM REIT asset class remains out of favour with allocators
given the long-term absolute performance. Indeed EM REITs, with a total return
of minus 23% over the ten years ending June 2022, have proved the exception to
the "Everything Rally" of the past decade. Although this weak performance does
not imply imminent mean reversion the value characteristics of the asset class
- a dividend yield of 5.4%, price to book value of 0.7x and P/E ratio of 7.8x
- speak for themselves.
Despite the relative underperformance over the period, over 95% of CLIM's
assets remain ahead of benchmark and peer group over the five years ended June
2022 (see CLIM Composite Returns chart on page 12 of the full report).
Net flows were positive over the year following the reopening of the INTL CEF
strategy in December 2020. Outflows continued in the EM CEF strategy as the
ten-year downtrend in relative performance between developed market and EM
equities remained in place. On a positive note outflows slowed markedly in H2
coincident with a reversal in this trend.
Robust new CEF issuance increased the universe by over US$30 billion in the
twelve months ending June 2022. An enlarged universe of global CEFs (funds
that invest in world markets including the USA) and US equity focused CEFs
encouraged CLIG to seed a Global CEF strategy. This product invests in global
equity markets including the USA (in contrast to the INTL CEF strategy which
excludes the USA) and fills a niche for US institutions that prefer a "one
stop shop" solution for their global equity exposure. The INTL, Global, OV and
EM REIT strategies have significant capacity and will remain a focus for
marketing.
CLIM continues to develop proprietary solutions to enhance and refine the
investment process; typically this involves further development of our
research database to improve productivity and client outcomes. The ability to
fully look through CLIM's portfolios to the underlying securities was an
important development in 2020/21. Subsequently we have partnered with
StyleAnalytics to better understand style factors and ESG risks in CLIM's
portfolios.
CEF discounts are the overriding consideration in CLIM's investment process
but our manager due diligence does include a review of how ESG risk is managed
by the underlying managers. We undertake this work in order to encourage
managers to improve their ESG disclosures and also to keep our clients better
informed about their portfolios. We believe that improved transparency will
result in better management of ESG risks by CEF managers and ultimately in
better returns for our clients. The raw scores for MSCI ACWI suggest that
companies are improving their ESG performance. In addition, based on
Sustainalytics' analysis, CLIM's CEF portfolios have slightly lower overall
ESG risk than their benchmarks on average, though this is not a targeted
outcome. Our detailed annual stewardship report is available here:
https://www.citlon.com/esg-reports/ AnnualStewardshipReport3_22.pdf
The direction of equity markets is important for fund management companies.
Additionally, for CLIM, higher markets in a bullish environment typically
result in tighter discounts which benefits performance - the same can also be
true in reverse. That said the factors that have negatively impacted our
investment performance over the last six months - widespread active manager
underperformance and significant geopolitically driven asset dislocations -
are fortunately rare events. Our focus on exploiting discount volatility has
served clients well for over thirty years in both bull and bear markets. Wide
discounts and persistent discount volatility give us confidence that our CEF
strategies will continue to meet our clients' longer term performance
expectations.
INVESTMENT REVIEW - KIM
The war in Ukraine, global inflationary concerns, and global economic growth
prospects are three major conditions that have rattled both the stock and bond
markets so far this year.
Recap and outlook
On 13th June 2022 the S&P 500 Index close marked a greater than 20%
decline from the recent peak on 3rd January 2022 and the Bloomberg US
Government/ Credit Bond Index and Bloomberg Municipal Bond Index both
continued losses from the first quarter at a historic pace rarely seen.
Aggregate supply continues to be restricted (largely due to COVID and global
pressures tied to Ukraine) and demand has been elevated (due to improved
personal balance sheets and pent up demand post-COVID reopening). The US
Federal Reserve (Fed) was also extremely accommodative since the pandemic and
heading into this year, with low borrowing costs aiding both consumers and
businesses.
Coupled with other government aid and borrowing, some fear that the Fed may
have waited too long to steer the US economy toward a soft landing (i.e. away
from a recession). Nevertheless, the Fed has thus far raised rates by 2.25%
and markets expect the Fed funds rate to peak at 3.5% by year-end. The Fed has
also begun to unwind its balance sheet by allowing some of the proceeds of
maturing bonds to roll-off. In addition to this, balance sheet reductions were
announced to scale up to US$95 billion each month by the end of September
2022.
Two consecutive quarters of negative GDP in the US coupled with an inverted
yield curve are signalling that a recession is likely on the horizon. At the
forefront for investors is whether the Fed will continue on its quest to quell
inflation or whether it will pivot at any sign of market stress and turn
dovish. Either way, we foresee returns below historic norms and anticipate
continued volatility.
Performance
KIM's strategies performed well over the past twelve months driven in large
part by our tactical reduction of closed-end funds (CEFs) and our significant
allocation to special purpose acquisition companies (pre-acquisition) (SPACs)
trading at discounts to trust value.
Our discipline calls for us to lower our exposure to CEFs when discounts are
narrow. This allows us to lock in the added value and affords us "dry powder"
to purchase CEFs when discounts widen. Our approach worked well as CEF
discounts widened significantly year over year. Additionally, CEF net asset
value performance was generally poor throughout the year.
Where applicable, we opportunistically allocated a significant portion of our
fixed income and balanced accounts to SPACs. Our conservative approach is
based on utilising SPACs as a short-term fixed income alternative. Among other
reasons, we like SPACs because they can trade at a premium or discount to the
cash value of the trust account (similar to CEFs). By purchasing shares below
the cash value of the trust account, we view our approach as buying cash at a
discount. Moreover, if the SPAC management company finds what the market
perceives to be an attractive acquisition, shares of the SPAC could trade
above cash value.
Clients benefited from our allocation to SPACs as they were one of the few
asset classes that produced positive returns over the twelve months ended 30th
June 2022. With all of this said, we continue to favour the risk/reward
proposition offered by SPACs.
Despite solid short and long-term performance, flows were net negative as high
net worth clients withdrew funds to pay taxes and institutional clients sought
to rebalance. While markets have been challenging, we feel that our strategy
has held up very well. With volatility comes opportunity and we feel our
strategy is positioned well to capitalise on market inefficiencies.
BUSINESS DEVELOPMENT REVIEW
CLIG's FuM were US$9.2 billion (£7.6 billion) as at 30th June 2022. This
compares with US$11.4 billion (£8.3 billion) as at 30th June 2021.
Despite volatile asset markets, net investment flows were US$102 million for
the Group over the period, with City of London Investment Management (CLIM)
posting net gains, while Karpus Investment Management (KIM) saw net outflows
as clients reduced exposure to markets in the second half of the year. After a
pause in 2020, recently renewed marketing emphasis for the International
closed-end fund (CEF) strategy was rewarded, in combination with the excellent
long-term track record.
A key reason for the merger was to diversify FuM, with Emerging Market (EM)
CEF strategies now accounting for 40% of Group FuM at 30th June 2022, as
compared to 47% at 30th June 2021. KIM provides balanced mandates for high net
worth and wealth management clients in the US, with both equity and fixed
income investments. At 30th June 2022, KIM strategies comprised 37% of Group
FuM, while International CEF strategies totaled 20% of Group FuM.
With regard to business development, the Group continues to develop an active
pipeline across all of its major CEF offerings.
Performance
Long-term investment performance across the EM and INTL CEF strategy, as well
as Conservative Balanced mandates, remains strong, with first or second
quartile results versus manager peers over the three, five and ten-year
rolling periods ending 30th June 2022.
For the year ended 30th June 2022, investment performance was behind relevant
benchmarks for the bulk of CLIM's assets due to a combination of country
allocation in the EM strategy and NAV performance at the underlying CEFs in
the INTL and OV strategies. KIM's equity and fixed-income strategies
outperformed their market indices over the period, while US equity lagged its
benchmark.
The Global Emerging Markets Composite net investment returns for the rolling
one year ended 30th June 2022 were -27.9% vs. -25.3% for the MSCI Emerging
Markets Index in USD, and -24.6% for the S&P Emerging Frontier Super BMI
Index in USD.
The KIM Conservative Balanced Composite net investment returns for the rolling
one year ended 30th June 2022 were -9.7% vs. -11.3% for the Morningstar US
Fund Allocation - 30% to 50% Equity Category in USD.
The International CEF Composite net investment returns for the rolling one
year ended 30th June 2022 were -23.7% vs. -19.4% for the MSCI ACWI ex US in
USD.
The Frontier Markets Composite net investment returns for the rolling one year
ended 30th June 2022 were -8.6% vs. -15.6% for the S&P Frontier EM 150
benchmark in USD.
The Opportunistic Value Composite net investment returns for the rolling one
year ended 30th June 2022 were -18% vs. -15.2% for the 50/50 MSCI
ACWI/Barclays Global Aggregate Bond benchmark in USD.
Outlook
Marketing efforts will continue to be targeted at investment consultants,
foundations, endowments and pension funds. We will also continue to introduce
our capabilities to family offices, outsourced CIO firms, and alternative
consultants.
Our International CEF, Balanced mandates, Opportunistic Value capabilities and
REIT strategies will be the focus of our product diversification and business
development activities.
FINANCIAL REVIEW
The Group income statement is presented in line with UK-adopted International
Accounting Standards on page 94 of the full report but the financial
information is reviewed by the management and the Board in a slightly
different way, as in the table provided below. This makes it easier to
understand the Group's operating results and shows the profits to which the
Group's profit-share provision applies.
Consolidated income for financial years ended 30th June
2022 2021
£'000 £'000
Gross fee income 61,294 55,123
Commissions (1,599) (1,101)
Custody fees (1,492) (1,572)
Net fee income 58,203 52,450
Interest (121) (117)
Total net income 58,082 52,333
Employee costs (13,229) (11,126)
Other administrative expenses (5,781) (4,867)
Depreciation and amortisation (696) (719)
Total overheads (19,706) (16,712)
Profit before profit-share/EIP/share options - operating profit 38,376 35,621
Profit-share (9,162) (7,923)
EIP (1,298) (1,008)
Share option (charge)/credit (34) 12
Investment (loss)/gain (659) 540
Pre-tax profit before exceptional item and amortisation of intangibles
acquired on acquisition
27,223 27,242
Acquisition - related costs - (1,743)
Amortisation of intangibles (4,051) (3,250)
Pre-tax profit 23,172 22,249
Tax (5,081) (5,259)
Post-tax profit 18,091 16,990
Group income statement and statement of comprehensive income
For the first time the financial results for KIM for the full twelve-month
period have been included in the consolidated income statement ended 30th June
2022. The merger with KIM was completed on 1st October 2020 and thus the
consolidated income statement for the year ended 30th June 2021 only included
the results for KIM over the nine-month period.
FuM
FuM at 30th June 2022 were US$9.2 billion compared with US$11.4 billion at the
end of the prior financial year. The decrease was due to a combination of
investment flows, market movements and performance. Refer to the FuM by line
of business table within the CEO statement. Average FuM for the year increased
by 9% from US$9.7 billion in FY 2021 to US$10.5 billion in FY 2022.
Revenue
The Group's gross revenue comprises management fees charged as a percentage of
FuM. The Group's gross revenue has increased YoY by 11% to £61.3 million
(2021: £55.1 million). The increase in revenue is primarily due to a full
year of revenue for KIM in FY 2022 (nine months in 2021), higher average FuM
during the year and by a stronger US dollar against sterling, with an average
GBP/USD rate of 1.33 this year compared with 1.35 last year, an increase of
c.2% over last year's average rate.
Commission payable of £1.6 million (2021: £1.1 million) relates to fees due
to US registered investment advisers for the introduction of wealth management
clients. The increase is primarily due to a full year of results for KIM being
included in FY 2022.
The Group's net fee income, after custody charges of £1.5 million (2021:
£1.6 million), is £58.2 million (2021: £52.5 million), an increase of 11%
on last year. The Group's average net fee margin for the year was 73bp as
compared to 74bp for the year ended June 2021.
Net interest paid is made up of interest earned on bank deposits offset by
interest paid on lease obligations. Refer to page 104 of the full report for
our lease accounting policy and page 107 of the full report for details of net
interest paid.
Costs
Total overheads before profit share, EIP, share option charge and investments
(losses)/gains for the year totalling £19.7 million (2021: £16.7 million)
were 18% higher than 2021, which was primarily on account of the inclusion of
full year results for KIM.
The Group's cost/income ratio, arrived at by comparing total overheads with
net fee income, was 34% in FY 2022 (2021: 32%).
The largest component of overheads continues to be employee-related at £13.2
million (2021: £11.1 million), an increase of 19% over last year. This is
mainly on account of the full year of KIM employee costs in FY 2022 (as
compared to nine months of costs in FY 2021) and a stronger US dollar during
the second half of FY 2022. Average headcount in FY 2022 was 114 as compared
to 99 in FY 2021. Other administrative overheads have increased by a similar
19% to £5.8 million (2021: £4.9 million) mainly due to a full year of KIM
costs included in FY 2022, a stronger US dollar during the second half of FY
2022 as well as an increase in travel and marketing costs post-COVID.
Total net fee income less overheads resulted in a profit before profit-share/
EIP/share options charge and investment (losses)/gain of £38.4 million (2021:
£35.6 million).
The total variable profit-share amounted to £9.2 million as compared with
£7.9 million in 2021, an increase of 15.6% mainly on account of the full year
of KIM costs included in FY 2022 as well as the impact of a stronger US dollar
during the second half of FY 2022.
The Group's Employee Incentive Plan (EIP) charges amounted to £1.3 million
(2021: £1.0 million), the increase is a result of the impact of a stronger US
dollar during the second half of FY 2022 and KIM employees' full year
participation in the current year's plan. The Group's EIP was offered to KIM
employees from 1st January 2021 and thus FY 2021 only included a charge for
six months.
Investment (losses)/gains
Investment losses of £0.7 million (2021: gain of £0.5 million) relate to the
unrealised (losses)/gains on the Group's seed and other investments.
Amortisation of intangibles
Intangible assets relating to direct customer relationships, distribution
channels and KIM's trade name recognised on the merger with KIM are being
amortised over 7-15 years (refer to note 1.6 of the financial statements) and
have resulted in an amortisation charge of £4.1 million for the year (2021:
£3.3 million). Deferred tax liability as at 30th June 2022 amounted to £8.6
million based on the relevant tax rate, which will unwind over the useful
economic life to the associated assets. Goodwill amounting to £69.7 million
was also recognised on the completion of the merger. Foreign currency
translation differences on the closing balances of intangibles have been
recognised in other comprehensive income. Refer to note 12 of the full report
financial statements for more details.
Taxation
The pre-tax profit of £23.2 million (2021: £22.2 million), after a
corporation tax charge of £5.1 million in FY 2022 (2021: £5.3 million), at
an effective rate of 22% (2021: 24%), results in a post-tax profit of £18.1
million (2021: £17.0 million), which is all attributable to the equity
shareholders of the Company.
Group statement of financial position
The Group's financial position continues to be strong and liquid, with cash
resources of £22.7 million as at 30th June 2022 as compared with £25.5
million as at 30th June 2021. As a result of the merger with KIM in October
2020, as at 30th June 2022, c.53% of the Group's shareholders are now based in
North America. Although the Group continues to declare dividends in sterling,
from October 2022, we have provided the option for shareholders to receive
dividends either in sterling or US dollars, at a pre-determined exchange rate.
Further, post-merger c.66% of Group's operating expenses are incurred in
non-sterling currencies. In order to pay the anticipated US dollar dividends
and non-sterling expenses, c.58% of the Group's cash resources are held in US
dollars as at 30th June 2022.
The Group invested US$5 million (£3.9 million) in seeding its two REIT funds
at the start of January 2019. By the end of June 2022, these investments were
valued at £3.8 million (2021: £4.2 million), with the unrealised loss (2021:
gains) taken to the income statement.
During the year the Group has invested US$2.5 million (£1.9 million) in
seeding a new Global Equity CEF Fund in December 2021 and US$2.5 million
(£1.9 million) in a Special Purpose Acquisition Company (SPAC) strategy in
March 2022. By the end of June 2022, these investments were valued at £3.6
million (2021: nil), with the unrealised loss of £0.2m (2021: nil) taken to
the income statement.
The International REIT and Global Equity CEF funds are assessed to be under
the Group's control and are thus consolidated using accounts drawn up as of
30th June 2022. There were no third party investments, collectively known as
the non-controlling interest (NCI) in these funds as at 30th June 2022 (2021:
£0.2 million).
The Group's right-of-use assets (net of amortisation) amounted to £2.4
million as at 30th June 2022 as compared with £2.8 million as at 30th June
2021. Additions to the right-of-use assets during the year are on account of
the Singapore office lease being modified and extended during the period.
The EBT purchased 552,730 shares (2021: 496,354 shares) at a cost of £2.7
million (2021: £2.5 million) in preparation for the annual EIP awards due at
the end of October 2022.
The EIP has had a consistently high level of participation each year since
inception (>60% of Group employees), with the first tranche of awards
vesting in October 2018. Only 23.5% (2021: 21.1%) of the shares vesting during
the year were sold in order to help cover the employees' resulting tax
liabilities, leading to a very healthy 76.5% (2021: 78.9%) share retention
within the Group.
In addition, Directors and employees exercised 92,000 (2021: 226,875) options
over shares held by the EBT, raising £0.3 million (2021: £0.8 million) which
was used to pay down part of the loan to the EBT.
Dividends paid during the year totalled £21.5 million (2021: £9.7 million).
The total dividend of 46.5p per share comprised: the 22p per share final
dividend for 2020/21, 11p per share interim dividend for the current year and
a special dividend of 13.5p per share paid on 25th March 2022 (2021: 20p per
share final for 2019/20 and 11p per share interim). The Group's dividend
policy is set out on page 22 of the full report.
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, CLIM, is regulated by the FCA. As required
under the Capital Requirements Directive, the underlying risk management
controls and capital position are disclosed on CLIM's website www.citlon.co.uk
(http://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. The
table presented below aims to illustrate the effect of a change in the US
dollar/sterling exchange rate on the Group's post-tax profits at various FuM
levels, based on the assumptions given, which are a close approximation of the
Group's current operating parameters. You can see from the illustration that a
change in exchange rate from 1.25 to 1.16 increases post-tax profits by £1.8
million from £15.6 million to £17.4 million on FuM of US$9.4 billion.
FX/Post-tax profit matrix
Illustration of US$/£ rate effect:
FuM US$bn: 8.2 9.2 9.4 9.9 10.4
US$/£ Post-tax, £m
1.16 13.2 16.5 17.4 19.0 20.7
1.20 12.5 15.8 16.6 18.2 19.7
1.25 11.7 14.8 15.6 17.1 18.7
1.28 11.3 14.3 15.1 16.6 18.1
1.32 10.7 13.7 14.4 15.9 17.3
Assumptions: CLIM KIM
1. Average net fee 71bps 76bps
2. Annual operating costs £6.7m plus US$9.4m plus S$0.8m (£1 = S$1.68) US$7.9m
3. Average tax 22% 24%
4. Amortisation of intangible £3.4m per annum
Note: The above table is intended to illustrate the approximate impact of
movement in US$/£, given an assumed set of trading conditions. It is not
intended to be interpreted or used as a profit forecast.
It is worth noting though that while the Group's fee income is assessed by
reference to FuM expressed in US dollars, almost 40% of the underlying
investments are primarily in emerging market-related stocks, 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 subsidiaries' non-sterling
assets and liabilities, which are again to a great extent in US dollars. For
the UK incorporated entities, 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 2022, these forward sales totalled US$24.5
million, with a weighted average exchange rate of US$1.29 to £1 (2021: US$8.3
million at a weighted average rate of US$1.40 to £1).
The exchange rate differences arising from translating functional currency to
presentation currency for KIM are recognised in the Group's other
comprehensive income.
Viability statement
In accordance with the provisions of the UK Corporate Governance Code, the
Directors have assessed the viability of the Group over a three-year period,
taking into account the Group's current position and prospects, Internal
Capital Adequacy Assessment Process (ICAAP) and the potential impact of
principal risks and how they are managed as detailed in the risk management
report on pages 28 to 29 of the full report. The Group will produce its first
Internal Capital and Risk Assessment (ICARA) in FY 2023.
Period of assessment
While the Directors have no reason to believe that the Group will not be
viable over a longer period, given the uncertainties still associated with the
global pandemic, as well as economic and political factors and their potential
impact on financial markets, any longer time horizon assessments are subject
to a level of more uncertainty due to external factors.
Taking into account the recommendations of the Financial Reporting Council in
their 2021 thematic review publication, the Board has therefore determined
that a three-year period to 30th June 2025 constitutes an appropriate and
prudent timeframe for its viability assessment. This three year view is also
more aligned to the Group's detailed stress testing.
Assessment of viability
As part of its viability statement, the Board has conducted a robust
assessment of the principal risks facing the Group, including those that would
threaten its business model, future performance, solvency or liquidity. This
assessment includes continuous monitoring of both internal and external
environments to identify new and emerging risks, which in turn are analysed to
determine how they can best be mitigated and managed.
The primary risk is the potential for loss of FuM as a result of poor
investment performance, client redemptions, breach of mandate guidelines or
market volatility. The Directors review the principal risks regularly and
consider the options available to the Group to mitigate these risks so as to
ensure the ongoing viability of the Group is sustained.
The ICAAP is reviewed by the Board and incorporates a series of stress tests
on the Group's financial position over a three-year period. The level of
scenarios included within the ICAAP are significantly more severe than our
risk appetite, which include:
•significant fall in FuM
•significant fall in net fee margin
•combined stress (significant fall both in FuM and net fee margin)
Having reviewed the results of the stress tests, the Directors have concluded
that the Group would have sufficient resources in the stressed scenario and
that the Group's ongoing viability would be sustained. The stress scenario
assumptions would be reassessed if necessary over the longer term. An example
of a mitigating action in such scenarios would be a reduction in costs along
with a reduction in dividend.
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 their liabilities as they fall due over the next three
years.
On that basis, the Directors also considered it appropriate to prepare the
financial statements on the going concern basis as set out on page 84 of the
full report.
Alternative Performance Measures
The Directors use the following Alternative Performance Measures (APMs) to
evaluate the performance of the Group as a whole:
Underlying profit before tax - Profit before tax, adjusted for (loss)/gain on
investments, acquisition-related costs and amortisation of acquired
intangibles. This provides a measure of the profitability of the Group for
management's decision-making.
Underlying earnings per share - Underlying profit before tax, adjusted for tax
as per income statement, tax effect of adjustments and non-controlling
interest, divided by the weighted average number of shares in issue as at the
period end. Refer to note 9 in the full report financial statements for
reconciliation.
Alternative Performance Measures
Underlying profit and profit before tax Jun 22 Jun 21
£ £
Net fee income 58,203,284 52,450,936
Administrative expenses (30,199,393) (25,631,432)
Net interest paid* (121,054) (117,063)
Underlying profit before tax 27,882,837 26,702,441
Add back/(deduct):
Gain/(loss) on investments (659,231) 540,172
Acquisition-related costs - (1,743,424)
Amortisation on acquired intangibles (4,051,223) (3,250,185)
Profit before tax 23,172,383 22,249,004
* Net interest paid is made up of interest earned on bank deposits offset by
interest paid on lease obligations. Refer to page 104 of our full report for
our lease accounting policy and page 107 of our full report for details of net
interest paid.
FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 30TH JUNE 2022
Year to Year to
30th June 2022 30th June 2021
Note £ £
Revenue
Gross fee income 2 61,293,627 55,123,274
Commissions payable (1,598,421) (1,100,708)
Custody fees payable (1,491,922) (1,571,630)
Net fee income 58,203,284 52,450,936
Administrative expenses
Employee costs 23,532,973 20,045,406
Other administrative expenses 5,970,527 4,866,625
Depreciation and amortisation 4,747,116 3,969,586
(34,250,616) (28,881,617)
Underlying operating profit 3 23,952,668 23,569,319
Exceptional item
Acquisition-related costs - (1,743,424)
Operating profit 3 23,952,668 21,825,895
Finance income 5 32,136 557,861
Finance expense 5 (812,421) (134,752)
Profit before taxation 23,172,383 22,249,004
Income tax expense 6 (5,081,232) (5,258,486)
Profit for the period 18,091,151 16,990,518
Profit attributable to:
Non-controlling interests (NCI) - 19,285
Equity shareholders of the parent 18,091,151 16,971,233
Basic earnings per share 7 36.9p 39.4p
Diluted earnings per share 7 36.4p 38.8p
CONSOLIDATED AND COMPANY STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30TH JUNE 2022
Group Company
Year to Year to Year to Year to
30th June 2022 30th June 2021 30th June 2022 30th June 2021
£ £ £ £
Profit for the period 18,091,151 16,990,518 26,303,606 11,157,096
Other comprehensive income:
Foreign currency translation differences 12,826,714 (6,675,136) - -
Total comprehensive income for the period 30,917,865 10,315,382 26,303,606 11,157,096
Attributable to:
Equity shareholders of the parent 30,917,865 10,296,097 26,303,606 11,157,096
Non-controlling interests - 19,285 - -
CONSOLIDATED AND COMPANY STATEMENT OF FINANCIAL POSITION
30TH JUNE 2022
Group Company
30th June 2022 30th June 2021 30th June 2022 30th June 2021
Note £ £ £ £
Non-current assets
Property and equipment 511,208 455,983 247,832 280,596
Right-of-use assets 2,418,745 2,757,179 1,085,153 1,263,534
Intangible assets 8 110,078,091 100,961,992 17,867 7,377
Other financial assets 7,434,586 4,373,485 108,912,203 106,962,140
Deferred tax asset 394,831 366,405 5,066 9,458
120,837,461 108,915,044 110,268,121 108,523,105
Current assets
Trade and other receivables 6,498,019 6,953,470 5,180,722 6,662,266
Current tax receivable - - 1,132,209 1,005,736
Cash and cash equivalents 22,677,893 25,514,619 6,919,935 2,905,184
29,175,912 32,468,089 13,232,866 10,573,186
Current liabilities
Trade and other payables (9,461,606) (8,260,597) (3,749,598) (3,281,116)
Lease liabilities (388,986) (392,954) (121,573) (131,180)
Current tax payable (538,158) (1,367,564) - -
Creditors, amounts falling due within one year (10,388,750) (10,021,115) (3,871,171) (3,412,296)
Net current assets 18,787,162 22,446,974 9,361,695 7,160,890
Total assets less current liabilities 139,624,623 131,362,018 119,629,816 115,683,995
Non-current liabilities
Lease liabilities (2,213,854) (2,348,101) (1,026,248) (1,148,549)
Deferred tax liability (8,642,208) (8,696,813) (21,178) (24,141)
Net assets 128,768,561 120,317,104 118,582,390 114,511,305
Capital and reserves
Share capital 9 506,791 506,791 506,791 506,791
Share premium account 2,256,104 2,256,104 2,256,104 2,256,104
Merger relief reserve 9 101,538,413 101,538,413 101,538,413 101,538,413
Investment in own shares (7,045,817) (6,068,431) (7,045,817) (6,068,431)
Share option reserve 126,181 195,436 105,513 109,657
EIP share reserve 1,481,107 1,282,884 1,481,107 1,282,884
Foreign currency differences reserve 6,197,463 (6,629,251) - -
Capital redemption reserve 26,107 26,107 26,107 26,107
Retained earnings 23,682,212 27,019,584 19,714,172 14,859,780
Attributable to:
Equity shareholders of the parent 128,768,561 120,127,637 118,582,390 114,511,305
Non-controlling interests - 189,467 - -
Total equity 128,768,561 120,317,104 118,582,390 114,511,305
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 £26,303,606
(2021: £11,157,096).
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
30TH JUNE 2022
Foreign currency differences reserve Capital redemption reserve Total attributable to share-
Share premium account Investment in own shares Share option reserve EIP £ £ holders
Share capital £ Merger relief reserve £ £ Share Retained earnings £
£ £ reserve £ NCI Total
£ £ £
As at 30th June 2020 265,607 2,256,104 - (5,765,993) 241,467 1,232,064 45,885 26,107 20,626,405 18,927,646 170,182 19,097,828
Profit for the period - - - - - - - - 16,971,233 16,971,233 19,285 16,990,518
Other comprehensive income - - - - - - (6,675,136) - - (6,675,136) - (6,675,136)
Total comprehensive income - - - - - - (6,675,136) - 16,971,233 10,296,097 19,285 10,315,382
Transactions with owners
Issue of ordinary shares on merger 241,184 - 101,538,413 - - - - - - 101,779,597 - 101,779,597
Share issue costs - - - - - - - - (967,881) (967,881) - (967,881)
Share option exercise - - - 830,819 (119,787) - - - 119,787 830,819 - 830,819
Purchase of own shares - - - (2,503,244) - - - - - (2,503,244) - (2,503,244)
Share-based payment - - - - (12,023) 760,645 - - - 748,622 - 748,622
EIP vesting/forfeiture - - - 1,369,987 - (709,825) - - - 660,162 - 660,162
Deferred tax on share options - - - - 85,779 - - - (20,574) 65,205 - 65,205
Current tax on share options - - - - - - - - 33,738 33,738 - 33,738
Dividends paid - - - - - - - (9,743,124) (9,743,124) - (9,743,124)
Total transactions with owners 241,184 - 101,538,413 (302,438) (46,031) 50,820 - - (10,578,054) 90,903,894 - 90,903,894
As at 30th June 2021 506,791 2,256,104 101,538,413 (6,068,431) 195,436 1,282,884 (6,629,251) 26,107 27,019,584 120,127,637 189,467 120,317,104
Profit for the period - - - - - - - - 18,091,151 18,091,151 - 18,091,151
Other comprehensive income - - - - - - 12,826,714 - - 12,826,714 - 12,826,714
Total comprehensive income - - - - - - 12,826,714 - 18,091,151 30,917,865 - 30,917,865
Transactions with owners
Derecognisation of NCI holding - - - - - - - - - - (189,467) (189,467)
Share option exercise - - - 320,193 (38,435) - - - 38,435 320,193 - 320,193
Purchase of own shares - - - (2,665,042) - - - - - (2,665,042) - (2,665,042)
Share-based payment - - - - 34,291 884,265 - - - 918,556 - 918,556
EIP vesting/forfeiture - - - 1,367,463 - (686,042) - - - 681,421 - 681,421
Deferred tax on share options - - - - (65,111) - - - (7,902) (73,013) - (73,013)
Current tax on share options - - - - - - - - 25,853 25,853 - 25,853
Dividends paid - - - - - - - (21,484,909) (21,484,909) - (21,484,909)
Total transactions with owners - - - (977,386) (69,255) 198,223 - - (21,428,523) (22,276,941) (189,467) (22,466,408)
As at 30th June 2022 506,791 2,256,104 101,538,413 (7,045,817) 126,181 1,481,107 6,197,463 26,107 23,682,212 128,768,561 - 128,768,561
COMPANY STATEMENT OF CHANGES IN EQUITY
30TH JUNE 2022
Share premium account Share option reserve EIP Capital redemption reserve Total attributable to shareholders
£ Merger reserve Investment in own shares £ share £ Retained earnings £
Share capital £ £ reserve £
£ £
As at 30th June 2020 265,607 2,256,104 - (5,765,993) 241,467 1,232,064 26,107 14,363,024 12,618,380
Profit for the period - - - - - - - 11,157,096 11,157,096
Other comprehensive income - - - - - - - - -
Total comprehensive income - - - - - - - 11,157,096 11,157,096
Transactions with owners
Issue of ordinary shares on merger 241,184 - 101,538,413 - - - - - 101,779,597
Share issue costs - - - - - - - (967,881) (967,881)
Share option exercise - - - 830,819 (119,787) - - 43,546 754,578
Purchase of own shares - - - (2,503,244) - - - - (2,503,244)
Share-based payment - - - - (12,023) 760,645 - - 748,622
EIP vesting/forfeiture - - - 1,369,987 - (709,825) - - 660,162
Deferred tax on share options - - - - - - - (3,142) (3,142)
Current tax on share options - - - - - - - 10,261 10,261
Dividends paid - - - - - - - (9,743,124) (9,743,124)
Total transactions with owners 241,184 - 101,538,413 (302,438) (131,810) 50,820 - (10,660,340) 90,735,829
As at 30th June 2021 506,791 2,256,104 101,538,413 (6,068,431) 109,657 1,282,884 26,107 14,859,780 114,511,305
Profit for the period - - - - - - - 26,303,606 26,303,606
Other comprehensive income - - - - - - - - -
Total comprehensive income - - - - - - - 26,303,606 26,303,606
Transactions with owners
Share option exercise - - - 320,193 (38,435) - - 26,587 308,345
Purchase of own shares - - - (2,665,042) - - - - (2,665,042)
Share-based payment - - - - 34,291 884,265 - - 918,556
EIP vesting/forfeiture - - - 1,367,463 - (686,042) - - 681,421
Deferred tax on share options - - - - - - - (5,052) (5,052)
Current tax on share options - - - - - - - 14,160 14,160
Dividends paid - - - - - - - (21,484,909) (21,484,909)
Total transactions with owners - - - (977,386) (4,144) 198,223 - (21,449,214) (22,232,521)
As at 30th June 2022 506,791 2,256,104 101,538,413 (7,045,817) 105,513 1,481,107 26,107 19,714,172 118,582,390
CONSOLIDATED AND COMPANY CASH FLOW STATEMENT
FOR THE YEAR ENDED 30TH JUNE 2022
Group Company
30th June 2022 30th June 2021 30th June 2022 30th June 2021
Note £ £ £ £
Cash flow from operating activities
Profit/(Loss) before taxation 23,172,383 22,249,004 181,843 (888,940)
Adjustments for:
Depreciation of property and equipment 191,149 187,714 99,157 107,667
Depreciation of right-of-use assets 496,367 492,730 178,381 178,382
Amortisation of intangible assets 4,059,600 3,289,142 8,377 11,375
Loss on disposal of fixed assets 4,296 - 4,296 -
Share-based payment charge/(credit) 33,440 (12,023) 3,474 (697)
EIP-related charge 892,097 802,314 392,458 325,971
Unrealised loss/(gain) on investments 5 659,231 (540,172) 47,963 (282,169)
Interest receivable 5 (32,136) (17,689) (8,539) (253)
Interest payable on leased assets 5 153,190 133,827 87,111 97,444
Interest payable 5 - 925 - -
Translation adjustments 98,684 33,529 (141,847) 184,313
Cash generated from/(used in) operations before changes
in working capital 29,728,301 26,619,301 852,674 (266,907)
Decrease/(increase) in trade and other receivables 458,199 (439,607) 1,868,752 556,716
Increase in trade and other payables 1,886,245 2,800,465 1,156,028 3,251,325
Cash generated from operations 32,072,745 28,980,159 3,877,454 3,541,134
Interest received 5 32,136 17,689 8,539 253
Interest paid on leased assets 5 (153,190) (133,827) (87,111) (97,444)
Interest paid 5 - (925) - -
Taxation paid (7,004,074) (5,841,493) (154,496) (240,142)
Net cash generated from operating activities 24,947,617 23,021,603 3,644,386 3,203,801
Cash flow from investing activities
Dividends received from subsidiaries - - 26,160,323 12,200,000
Purchase of property and equipment and intangibles (258,852) (93,342) (89,557) (47,176)
Purchase of non-current financial assets (3,877,446) (715) (1,889,216) (724)
Proceeds from sale of current financial assets 8,442 - 8,442 -
Cash consideration paid on merger net of cash acquired - 946,773 - (107,943)
Net cash (used in)/generated from investing activities (4,127,856) 852,716 24,189,992 12,044,157
Cash flow from financing activities
Ordinary dividends paid 10 (21,484,909) (9,743,124) (21,484,909) (9,743,124)
Purchase of own shares by employee share option trust (2,665,042) (2,503,244) (2,665,042) (2,503,244)
Proceeds from sale of own shares by employee
share option trust 320,193 830,819 320,193 830,819
Payment of lease liabilities (407,772) (486,680) (131,908) (168,367)
Share issue costs - (967,881) - (967,881)
Net cash used in financing activities (24,237,530) (12,870,110) (23,961,666) (12,551,797)
Net (decrease)/increase in cash and cash equivalents (3,417,769) 11,004,209 3,872,712 2,696,161
Cash and cash equivalents at start of period 25,514,619 14,594,333 2,905,184 213,510
Cash held in funds* 40,936 20,357 - -
Effect of exchange rate changes 540,107 (104,280) 142,039 (4,487)
Cash and cash equivalents at end of period 22,677,893 25,514,619 6,919,935 2,905,184
Notes:
* Cash held in International REIT and Global Equity CEF funds are consolidated
using accounts drawn up as of 30th June.
NOTES TO THE FINANCIAL STATEMENTS
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 2022 and
30th June 2021 does not constitute statutory accounts and has been extracted
from the full accounts for the years ended 30th June 2022 and 30th June 2021.
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 2021 have been filed with the
Registrar of Companies. The accounts for the year ended 30th June 2022 will be
delivered to the Registrar of Companies in due course.
1. SIGNIFICANT ACCOUNTING POLICIES
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.
1.1 Basis of preparation
The financial statements have been prepared in accordance with UK-adopted
International Accounting Standards.
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.
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.
1.2 New or amended accounting standards and interpretations
The Group has adopted all the new or amended accounting standards and
interpretations issued by the International Accounting Standards Board (IASB)
that are mandatory for the current reporting period. Any new or amended
accounting standards that are not mandatory have not been early adopted.
The following amendments to standards have been adopted in the current period
and have not had a material impact on the Group's financial statements:
•IFRS 9, IAS 39 and IFRS 7 - Interest Rate Benchmark Reforms
•IFRS 16 - COVID-19 Related rent concessions
The following amended standards and interpretations are in issue but not yet
effective:
•IAS 16 (amendments) - Property, Plant and Equipment - Proceeds before
Intended Use (effective 1 January 2022)
•Annual Improvements 2018-2020 Cycle - Amendments to IFRS 1, IFRS 9, IFRS 16
and IAS 4) (effective 1 January 2022)
•IFRS 3 (amendments) - Reference to the Conceptual Framework (effective 1
January 2022)
•IAS 37 (amendments) - Onerous Contracts - Cost of Fulfilling a Contract
(effective 1 January 2022)
•IAS 1 (amendments) - Presentation of Financial Statements: Classification
of Liabilities as Current or Non-Current and Classification of Liabilities as
Current or Non-Current - Deferral of Effect Date (effective 1 January 2024)
The Directors do not expect the adoption of these standards and amendments to
have a material impact on the Financial Statements.
1.3 Accounting estimates and assumptions
The preparation of these financial statements in conformity with UK-adopted
International Accounting Standards requires management to make estimates and
judgments 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 areas of the financial statements that are subject to the
use of estimates and judgments are noted below:
(i) Share-based payments
Share-based payments relate to equity settled awards and are based on the fair
value of those awards at the date of grant. In order to calculate the charge
for share-based compensation as required by IFRS 2 Share-based payments, the
Group is required to estimate the fair value of the Employee Incentive Plan
(EIP) awards due to be granted in October 2022. 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. Refer to note 1.13 for accounting policy.
(ii) EM REIT fund
The Company has a c.20% ownership interest in the EM REIT fund. However, it
does not have any voting powers and its decision-making powers are held in the
capacity of an agent of the investors as a group. The Company has exercised
judgement and have concluded that it does not control or have significant
influence over this fund.
(iii) Impairment of Goodwill
The recognition of goodwill in a business combination and subsequent
impairment assessments are based on significant accounting estimates. Note 8
details our estimates and assumptions in relation to the impairment assessment
of goodwill.
1.4 Basis of consolidation
The consolidated financial statements are based on 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. The consolidated financial statements also
incorporate the results of the business combination using the acquisition
method. The acquiree's identifiable net assets are initially recognised at
their fair values at the acquisition date. The results of the acquired
business are included in the consolidated statement of comprehensive income
from the date on which control is obtained.
When assessing whether to consolidate an entity, the Group evaluates a range
of control factors as defined under IFRS 10 Consolidated financial statements,
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; and
•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 2022 are detailed below:
City of London Investment Group PLC holds a controlling interest in the
following:
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
Karpus Management Inc. Management of funds 100% USA
International REIT Fund * Delaware Statutory Trust Fund 100% USA
Global Equity CEF Fund Delaware Statutory Trust Fund 100% USA
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
* International REIT fund has a year-end of 31st December. As this fund has a
financial year end that differs from that of the Company, it is consolidated
using accounts drawn up as of 30th June.
The registered addresses of the subsidiary companies are as follows:
City of London Investment Management Company Limited 77 Gracechurch Street, London EC3V 0AS, UK
City of London US Investments Limited
City of London US Services Limited
City of London Latin America Limited
City of London Investment Management Company (Singapore) PTE Ltd 20 Collyer Quay, #10-04, Singapore 049319
Karpus Management Inc. 183 Sully's Trail, Pittsford, New York 14534, USA
International REIT fund 4005 Kennett Pike, Suite 250, Greenville, DE 19807, USA
Global Equity CEF Fund
City of London Latin America Limited is dormant and as such is not subject to
audit.
1.5 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-4 to 10 years
Computer and telephone equipment-4 to 10 years
1.6 Intangible assets
Intangible assets acquired separately are initially recognised at cost.
Intangible assets acquired through a business combination other than goodwill,
are initially measured at fair value at the date of the acquisition.
(i) Goodwill
Goodwill arises through a business combination. Goodwill represents the excess
of the purchase consideration paid over the fair value of the identifiable
assets, liabilities and contingent liabilities of the business at the date of
the acquisition.
Goodwill is measured at cost less accumulated impairment losses. Goodwill on
acquisition is allocated to a cash generating unit (CGU) that is expected to
benefit from the acquisition, for the purpose of impairment testing. The CGU
to which goodwill is allocated represents the lowest level at which goodwill
is monitored for internal management purposes. A CGU is identified as a group
of assets generating cash inflows which are independent from cash inflows from
other Group cash generating assets and are not larger than the Group's
operating segments.
(ii) Direct customer relationships and distribution channels
The fair values of direct customer relationships and distribution channels
acquired in the business combination have been measured using a multi-period
excess earnings method. These are amortised on a straight line basis over the
period of their expected benefit, being a finite life of 10 years for direct
customer relationships and a finite life of 7 years for distribution channels.
(iii) Trade name
The fair value of the trade name acquired in the business combination has been
measured using a relief from royalty method. This is amortised on a straight
line basis over the period of its expected benefit, being a finite life of 15
years.
(iv) Software licences
Software licences are capitalised at cost and amortised on a straight line
basis over the useful life of the asset. Costs are capitalised on the basis of
the costs incurred to acquire and bring into use the specific software. Costs
also include directly attributable overheads. The estimated useful life over
which the software is depreciated is between 4 to 10 years. Software integral
to a related item of hardware equipment is accounted for as property and
equipment. Costs associated with maintaining computer software programs are
expensed to the income statement as incurred.
1.7 Impairment of goodwill and other assets
Goodwill arising on acquisition is not subject to annual amortisation and
other assets listed in 1.6 (ii) and (iii) above which are amortised on a
straight line basis are tested annually for impairment, or more frequently if
changes in circumstances indicate a possible impairment. The Group annually
reviews the carrying value of its CGU to ensure that those assets have not
suffered from any impairment loss. The review compares the recoverable amount
of the CGU to which goodwill is allocated against its carrying amount. Where
the recoverable amount is higher than the carrying amount, no impairment is
required. The recoverable amount is defined as the higher of (a) fair value
less costs to sell or (b) value in use, which is based on the present value of
future cash flows expected to derive from the CGU.
Any impairment loss is recognised immediately through the income statement.
1.8 Business Combinations
The Group accounts for business combinations using the acquisition method. A
business combination is determined where in a transaction, the asset acquired
and the liabilities assumed constitute a business.
The consideration transferred on the date of the transaction is measured at
fair value as are the identifiable assets acquired and liabilities assumed.
Intangible assets are recognised separately from goodwill at the acquisition
date only when they are identifiable.
1.9 Financial instruments
Financial instruments are only recognised in the financial statements and
measured at fair value when the Group becomes party to the contractual
provisions of the instrument.
Under IFRS 9 Financial Instruments, financial assets are classified as either:
•amortised at cost;
•at fair value through the profit or loss; or
•at fair value through other comprehensive income.
Financial liabilities must be classified at fair value through profit or loss
or at amortised cost.
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
re-measured at fair value, with any movement recognised in the income
statement. The fair value of the Group's investments 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 liquid companies with a small bid-ask spread.
The consolidated Group assesses and would recognise a loss allowance for
expected credit losses on financial assets which are measured at amortised
cost. The measurement of the loss allowance depends upon the consolidated
entity's assessment at the end of each reporting period as to whether the
financial instrument's credit risk has increased significantly since initial
recognition, based on reasonable and supportable information that is
available, without undue cost or effort to obtain.
Where there has not been a significant increase in exposure to credit risk
since initial recognition, a twelve-month expected credit loss allowance is
estimated. This represents a portion of the asset's lifetime expected credit
losses that is attributable to a default event that is possible within the
next twelve months. Where a financial asset has become credit impaired or
where it is determined that credit risk has increased significantly, the loss
allowance is based on the asset's lifetime expected credit losses. The amount
of expected credit loss recognised is measured on the basis of the probability
weighted present value of anticipated cash shortfalls over the life of the
instrument discounted at the original effective interest rate.
Under the expected credit loss model, impairment losses are recorded if there
is an expectation of credit losses, even in the absence of a default event.
This model is applicable to assets amortised at cost or at fair value through
other comprehensive income. The assets on the Group's balance sheet to which
the expected loss applies to are fees receivable. At the end of each reporting
period, the Group assesses whether the credit risk of these trade receivables
has increased significantly since initial recognition, based on reasonable and
supportable information that is available, without undue cost or effort to
obtain.
1.10 Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and on-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.
1.11 Trade payables
Trade payables are measured at initial recognition at fair value and
subsequently measured at amortised cost.
1.12 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.
1.13 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 for all employees,
other than Executive Directors of CLIG. Awards granted from October 2021
onwards will vest (i.e. no longer be forfeitable) over a five-year period with
one-fifth vesting each year for the Executive Directors of CLIG.
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.
The Company operates 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 Black-Scholes pricing
model, and is being 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.
1.14 Revenue recognition
Revenue is recognised within the financial statements based on the services
that are provided in accordance with current investment management agreements
(IMAs). The fees are charged as a percentage of Funds under Management. The
performance obligations encompassed within these agreements are based on
daily/monthly asset management of funds. Payment terms are monthly/quarterly
in advance or in arrears. The Group has an enforceable right to the payment of
these fees for services provided, in accordance with the underlying IMAs.
For each contract, the Group: identifies the contract with a customer;
identifies the performance obligations in the contract; determines the
transaction price which takes into account estimates of variable consideration
and the time value of money; allocates the transaction price to the separate
performance obligations on the basis of the relative stand-alone selling price
of each distinct service to be delivered; and recognises revenue when or as
each performance obligation is satisfied in a manner that depicts the transfer
to the customer of services promised.
1.15 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.
1.16 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 subsidiaries, City of London Investment
Management Company Limited, Karpus Investment Management 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 and under
IAS 21 'The Effects of Changes in Foreign Exchange Rates', exchange rate
differences arising from translating a subsidiary company's functional
currency to presentation currency have to be recognised in the Group's other
comprehensive income.
Accordingly, on consolidation, exchange rate differences arising from
translating functional currency to presentation currency for Karpus Investment
Management are recognised in the Group's other comprehensive income.
However, for its other subsidiaries, the Group operates a policy whereby it
manages foreign exchange exposure of subsidiary monetary assets through its
inter-company accounts. Any gains or losses are recognised within the
Company's own income statement. Therefore, on consolidation, there are no
exchange differences arising from the translation of monetary items from the
subsidiary functional currency to its 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.
1.17 Leases
The total outstanding lease cost, discounted at the Group's weighted average
incremental borrowing rate to its present value, is shown as a lease liability
in the statement of financial position. The payment of the lease charge is
allocated between the lease liability and an interest charge in the income
statement.
On recognition of the lease liability, the associated asset is shown as a
right-of-use asset. This is further adjusted for any lease payments made prior
to adoption and any future restoration costs as implicit within the lease
contract. The resulting total value of the right-of-use asset is depreciated
on a straight line basis over the term of the lease period.
The Group re-measures the lease liability whenever:
•there is a change in the lease term;
•there is a change in the lease payments; and
•a lease contract is modified and the lease modification is not accounted
for as a separate lease.
Where there is a change in the lease term or lease payments, the lease
liability is re-measured by discounting the revised lease payments at the
current or revised discount rate depending on the nature of the event. Where
the lease liability is re-measured, a corresponding adjustment is made to the
right-of-use assets.
Where extension/termination options exists within a lease, the Group would
assess at the lease commencement date as to whether it is reasonably certain
that it will exercise these options. The Group would reassess these option if
there was a significant event or significant change in circumstances within
its control, which would warrant the Group with reasonable certainty to
exercise these options.
Payments in relation to short-term leases, those that are less than twelve
months in duration continue to be expensed to the income statement on a
straight line basis. At the end of the year, all of the Group's leases were
recognised as right-of-use assets.
1.18 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.
1.19 Exceptional items
Exceptional items are significant items of non-recurring expenditure that have
been separately presented by virtue of their nature to enable a better
understanding of the Group's financial performance. Exceptional items relate
to acquisition-related costs incurred by the Group in relation to its merger.
There were no exceptional items in the current financial year.
2 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 2022
Gross fee income 58,502,020 1,400,160 279,802 1,082,660 28,985 61,293,627
Non-current assets:
Property and equipment 263,376 - 233,693 - 14,139 511,208
Right-of-use assets 1,245,649 - 1,085,153 - 87,943 2,418,745
Intangible assets 110,060,224 - 17,867 - - 110,078,091
Year to 30th June 2021
Gross fee income 52,215,280 1,458,957 356,462 1,092,575 - 55,123,274
Non-current assets:
Property and equipment 175,387 - 254,197 - 26,399 455,983
Right-of-use assets 1,421,279 - 1,263,534 - 72,366 2,757,179
Intangible assets 100,954,615 - 7,377 - - 100,961,992
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. Included in
revenues are fees of £5,825,226 (2021: £5,470,051) which arose from fee
income from the Group's largest client. No other single client contributed 10%
or more to the Group's revenue in either of the reporting periods.
3. OPERATING PROFIT
Year to Year to
30th June 2022 30th June 2021
The operating profit is arrived at after charging: £ £
Depreciation of property and equipment 191,149 187,714
Depreciation of right-of-use assets 496,367 492,730
Amortisation of intangible assets 4,059,600 3,289,142
Auditor's remuneration:
- Statutory audit 141,984 122,318
- Audit related assurance services 25,000 20,297
- Under/(over)-accrual of prior year audit fees 5,143 (168)
Short-term lease expense 13,196 7,891
4 BUSINESS COMBINATIONS
On 1st October 2020, City of London Investment Group PLC completed the merger
of Snowball Merger Sub, Inc. with and into Karpus Management Inc. doing
business as Karpus Investment Management (KIM), a US-based investment
management business, on a debt-free basis, by way of a scheme of arrangement
in accordance with the New York Business Corporation Law, with KIM being the
surviving entity in the merger. CLIG acquired 100% of voting equity interest
in KIM and the merger was satisfied by issue of new ordinary shares and cash
for a total consideration of £101,887,540. KIM uses closed-end funds (CEFs)
amongst other securities as a means to gain exposure for its client base
comprising of US high net worth clients and corporate accounts. It qualifies
as a business as defined in IFRS 3 "Business Combinations". The merger is
considered to be of substantial strategic and financial benefit to the Group
and its shareholders.
Details of the net assets acquired, goodwill and purchase consideration are
detailed in note 6 on pages 107 and 108 of the Annual Report and Accounts for
the year ended 30th June 2021.
5 FINANCE INCOME AND FINANCE EXPENSE
Year to Year to
30th June 2022 30th June 2021
£ £
Finance income:
Interest on bank deposits 32,136 17,689
Unrealised gain on investments - 540,172
Total finance income 32,136 557,861
Finance expense:
Unrealised loss on investments (659,231) -
Interest payable on lease liabilities (153,190) (133,827)
Other interest payable - (925)
Total finance expense (812,421) (134,752)
Net finance (expense)/income (780,285) 423,109
6 TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES
Year to Year to
30th June 2022 30th June 2021
(a) Analysis of tax charge on ordinary activities: £ £
Current tax:
UK corporation tax at 19% (2021: 19%) based on the profit for the period 4,533,109 4,510,249
Double taxation relief (909,780) (947,061)
Adjustments in respect of prior years (53,810) 35,246
UK tax total 3,569,519 3,598,434
Foreign tax 2,720,112 2,435,832
Adjustments in respect of prior years (54,854) (81,966)
Foreign tax total 2,665,258 2,353,866
Total current tax charge 6,234,777 5,952,300
Deferred tax:
UK - origination and reversal of temporary differences (119,105) 39,423
Foreign - origination and reversal of temporary differences (1,034,440) (733,237)
Total deferred tax credit (1,153,545) (693,814)
Total tax charge in income statement 5,081,232 5,258,486
(b) Factors affecting tax charge for the current period:
The tax charge on profit for the year is different to that resulting from
applying the standard rate of corporation tax in the UK - 19% (prior year -
19%). The differences are explained below:
Year to Year to
30th June 2022 30th June 2021
£ £
Profit on ordinary activities before tax 23,172,383 22,249,004
Tax on profit from ordinary activities at the standard rate (4,402,753) (4,227,311)
Effects of:
Unrelieved overseas tax (3,614,710) (2,793,433)
Foreign profits taxed at rates different to those of the UK 2,574,111 1,922,253
Expenses not deductible for tax purposes (774,538) (947,021)
(Losses)/gains not eligible for tax (115,481) 49,022
Capital allowances less than depreciation (14,177) (19,255)
Prior period adjustments 108,664 46,720
Deferred tax originating from timing differences 1,153,545 693,814
Other 4,107 16,725
Total tax charge in income statement (5,081,232) (5,258,486)
7 EARNINGS PER SHARE
The calculation of earnings per share is based on the profit for the period
attributable to the equity shareholders of the parent divided by the weighted
average number of ordinary shares in issue for the period ended 30th June
2022.
As set out in the Directors' report on page 84 of the full report the Employee
Benefit Trust held 1,708,763 (2021: 1,591,158) ordinary shares in the Company
as at 30th June 2022. The Trustees of the Trust have waived all rights to
dividends associated with these shares. In accordance with IAS 33 Earnings per
share, the ordinary shares held by the Employee Benefit Trust have been
excluded from the calculation of the weighted average number of ordinary
shares in issue.
The calculation of diluted earnings per share is based on the profit for the
period attributable to the equity shareholders of the parent divided by the
diluted weighted average number of ordinary shares in issue for the period
ended 30th June 2022.
Reported earnings per share
Year to Year to
30th June 2022 30th June 2021
£ £
Profit attributable to the equity shareholders of the parent for basic 18,091,151 16,971,233
earnings
Number of shares Number of shares
Issued ordinary shares as at 1st July 50,679,095 26,560,707
Effect of own shares held by EBT (1,614,063) (1,502,266)
Effect of shares issued in the period - 18,039,233
Weighted average shares in issue 49,065,032 43,097,674
Effect of movements in share options and EIP awards 647,134 677,739
Diluted weighted average shares in issue 49,712,166 43,775,413
Basic earnings per share (pence) 36.9 39.4
Diluted earnings per share (pence) 36.4 38.8
Underlying earnings per share*
Underlying earnings per share is based on the underlying profit after tax*,
where profit after tax is adjusted for gain/loss on investments,
acquisition-related costs, amortisation of acquired intangibles, their
relating tax impact and non-controlling interest.
Underlying profit for calculating underlying earnings per share
Year to Year to
30th June 2022 30th June 2021
£ £
Profit before tax 23,172,383 22,249,004
Add back:
- Loss/(gain) on investments 659,231 (540,172)
- Acquisition-related costs - 1,743,424
- Amortisation on acquired intangibles 4,051,223 3,250,185
Underlying profit before tax 27,882,837 26,702,441
Tax expense as per the consolidated income statement (5,081,232) (5,258,486)
Tax effect of fair value adjustments (125,253) 102,633
Unwinding of deferred tax liability (972,294) (780,045)
Adjustment for NCI - (19,285)
Underlying profit after tax for the calculation of underlying earnings per 21,704,058 20,747,258
share
Underlying earnings per share (pence) 44.2 48.1
Underlying diluted earnings per share (pence) 43.7 47.4
* This is an Alternative Performance Measure (APM). Please refer to the
Financial Review for more details on APMs.
8 INTANGIBLE ASSETS
Group Direct customer relationships Distribution channels Trade name Long term software Total 30th June 2021
Goodwill
£ £ £ £ £ £ £
Cost
At start of period 65,123,297 33,472,334 4,590,186 1,018,983 689,100 104,893,900 761,971
Acquired on acquisition - - - - - - 111,323,195
Additions - - - - 18,867 18,867 -
Currency translation 8,839,613 4,343,439 583,967 134,247 - 13,901,266 (7,191,266)
At close of period 73,962,910 37,815,773 5,174,153 1,153,230 707,967 118,814,033 104,893,900
Amortisation charge
At start of period - 2,673,300 522,535 54,350 681,723 3,931,908 714,662
Currency translation - 612,302 119,684 12,448 - 744,434 (71,896)
Charge for the period - 3,332,159 651,319 67,745 8,377 4,059,600 3,289,142
At close of period - 6,617,761 1,293,538 134,543 690,100 8,735,942 3,931,908
Net book value:
At close of period 73,962,910 31,198,012 3,880,615 1,018,687 17,867 110,078,091 100,961,992
Company
Cost
At start of period 57,162 57,162 57,162
Additions 18,867 18,867 -
At close of period 76,029 76,029 57,162
Amortisation charge
At start of period 49,785 49,785 38,410
Charge for the period 8,377 8,377 11,375
At close of period 58,162 58,162 49,785
Net book value 17,867 17,867 7,377
Goodwill, direct customer relationships, distribution channels and trade name
acquired through business combination relate to the merger with KIM on 1st
October 2020.
The fair values of KIM's direct customer relationships and the distribution
channels have been measured using a multi-period excess earnings method. The
model uses estimates of annual attrition driving revenue from existing
customers to derive a forecast series of cash flows, which are discounted to a
present value to determine the fair values of KIM's direct customer
relationships and the distribution channels.
The fair value of KIM's trade name has been measured using a relief from
royalty method. The model uses estimates of royalty rate and percentage of
revenue attributable to trade name to derive a forecast series of cash flows,
which are discounted to a present value to determine the fair value of KIM's
trade name.
The total amortisation charged to the income statement during the financial
year in relation to direct client relationships, distribution channels and
trade name was £4,051,223 (2021: £3,250,185).
Impairment
Goodwill acquired through the business combination is in relation to the
merger with KIM and relates to the acquired workforce and future expected
growth of the CGU.
The Group has carried out an annual review of the carrying value of the CGU to
which the goodwill is allocated to see if it has suffered any impairment. The
recoverable amount of the CGU is determined by its value in use. This
income-based approach model is based on the estimates of future cash flows,
over a four-year period plus a terminal value, discounted to its present
value.
The Group's cash flow forecasts are based on its most recent and current
trading activity and on current financial budgets for twelve months that are
approved by the Board. The key assumptions underlying the budgets are based on
the most recent trading activity with built in organic growth, revenue and
cost margins. The Board approved budget is extrapolated for a total of three
years and then a terminal value is calculated. The annual growth rate used for
extrapolating revenue forecasts was 4.1% and for direct costs was 3.0% based
on the Group's expectation of future growth of the business.
A Gordon growth model was applied to estimate the terminal value based on a
long-term growth rate of 3.0% and is based on both economic and industry
growth outlooks. The pre-tax discount rate used to measure the value in use of
the cash generating unit was 17.4% which reflects specific risks relating to
the CGU and is based on the risk adjusted weighted average cost of capital.
The goodwill impairment assessment date of 30th April 2022 was different to
the current reporting date. The performance of the CGU is reviewed for the
period between the assessment date and the reporting date to determine whether
any changes in circumstances or impairment indicators have occurred since the
assessment date. Following our review, it was determined that there were no
changes in circumstances or impairment indicators that would require the CGU
to be impaired at the reporting date.
The recoverable amount of the CGU exceeded the carrying amount of the CGU at
30th April 2022 by £1,391,854 (2021: £6,745,000).
Sensitivity analysis was applied to the key assumptions to measure the impact
on the headroom in existence under the current impairment review. The areas
where the sensitivity analysis was tested related to discount rates used,
movements in FuM, and impact on margins.
Following the sensitivity review, the recoverable amount of this CGU would
equal its carrying amount if the key assumptions were to change as follows:
2022
From To
Pre-tax discount rate 17.4% 17.6%
Average FuM growth rate 2.5% 1.5%
Average EBIT margin 54.5% 54%
The Directors and management have considered and assessed possible changes to
other key assumptions and have not identified any instances that could cause
the carrying amount of the CGU to exceed its recoverable amount. Current
economic circumstances have become more uncertain due to events outside the
control of the business such as the impact of the war in Ukraine. The
potential impact on global markets cannot be reliably estimated and if these
result in a sustained period of weakness in financial markets this could
result in a future impairment.
Based on the recoverable amount, using the value in use model, no impairment
was required at 30th June 2022.
9 SHARE CAPITAL AND MERGER RELIEF RESERVE
Share capital Merger relief reserve
Group and Company £ £
At start and end of period 50,679,095 ordinary shares of 1p each 506,791 101,538,413
10 DIVIDEND
30th June 2022 30th June 2021
£ £
Dividends paid:
Interim dividend of 11p per share (2021: 11p) 5,394,361 4,762,818
Special dividend of 13.5p per share (2021: nil) 6,620,352 -
30th June 2021 of 22p per share (2020: 20p) 9,470,196 4,980,306
21,484,909 9,743,124
A final dividend of 22p per share (gross amount payable £11,149,401; net
amount payable £10,773,473) has been proposed, payable on 4th November 2022,
subject to shareholder approval, to shareholders who are on the register of
members on 30th September 2022.
*Difference between gross and net amounts is due to shares held at EBT that do
not receive dividend.
11 FINANCIAL INSTRUMENTS
The Group's financial assets include cash and cash equivalents, investments
and other receivables. Its financial liabilities include accruals, lease
liabilities 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 IFRS 9 Financial Instruments:
Group
Assets at fair value through
Financial assets
30th June 2022 at amortised cost profit or loss Total
Assets as per statement of financial position £ £ £
Other non-current financial assets - 7,434,586 7,434,586
Trade and other receivables 5,210,164 _ 5,210,164
Cash and cash equivalents 22,677,893 _ 22,677,893
Total 27,888,057 7,434,586 35,322,643
Liabilities at
fair value
Financial liabilities through
at amortised cost profit or loss Total
Liabilities as per statement of financial position £ £ £
Trade and other payables 8,350,276 945,898 9,296,174
Current lease liabilities 388,986 - 388,986
Non-current lease liabilities 2,213,854 - 2,213,854
Total 10,953,116 945,898 11,899,014
Assets at fair
Financial assets at amortised cost value through
30th June 2021 profit or loss Total
Assets as per statement of financial position £ £ £
Other non-current financial assets - 4,373,485 4,373,485
Trade and other receivables 5,871,731 _ 5,871,731
Cash and cash equivalents 25,514,619 _ 25,514,619
Total 31,386,350 4,373,485 35,759,835
Liabilities at
fair value
Financial liabilities through
at amortised cost profit or loss Total
Liabilities as per statement of financial position £ £ £
Trade and other payables 8,040,676 69,558 8,110,234
Current lease liabilities 392,954 - 392,954
Non-current lease liabilities 2,348,101 - 2,348,101
Total 10,781,731 69,558 10,851,289
Company
Assets at fair value through
Investment in Financial assets
30th June 2022 subsidiaries at amortised cost profit or loss Total
Assets as per statement of financial position £ £ £ £
Other non-current financial assets 103,244,651 3,849,385 1,818,167 108,912,203
Trade and other receivables - 4,764,485 - 4,764,485
Cash and cash equivalents - 6,919,935 - 6,919,935
Total 103,244,651 15,533,805 1,818,167 120,596,623
Liabilities at
fair value
Financial liabilities through
at amortised cost profit or loss Total
Liabilities as per statement of financial position £ £ £
Trade and other payables 3,530,682 76,196 3,606,878
Current lease liabilities 121,573 - 121,573
Non-current lease liabilities 1,026,248 - 1,026,248
Total 4,678,503 76,196 4,754,699
Assets at fair value through
Investment in Financial assets
30th June 2021 subsidiaries at amortised cost profit or loss Total
Assets as per statement of financial position £ £ £ £
Other non-current financial assets 103,127,205 1,960,169 1,874,766 106,962,140
Trade and other receivables - 6,322,463 - 6,322,463
Cash and cash equivalents - 2,905,184 - 2,905,184
Total 103,127,205 11,187,816 1,874,766 116,189,787
Liabilities at
fair value
Financial liabilities through
at amortised cost profit or loss Total
Liabilities as per statement of financial position £ £ £
Trade and other payables 3,149,674 - 3,149,674
Current lease liabilities 131,180 - 131,180
Non-current lease liabilities 1,148,549 - 1,148,549
Total 4,429,403 - 4,429,403
(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.
- Unlisted equity securities are valued using the net assets of the underlying
companies and are shown under level 3.
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 2022 £ £ £ £
Financial assets at fair value through profit or loss
Investment in other non-current financial assets 5,616,419 1,818,167 - 7,434,586
Total 5,616,419 1,818,167 - 7,434,586
Financial liabilities at fair value through profit or loss
Forward currency trades - 945,898 - 945,898
Total - 945,898 - 945,898
Level 1 Level 2 Level 3 Total
30th June 2021 £ £ £ £
Financial assets at fair value through profit or loss
Investment in other non-current financial assets 2,498,719 1,874,766 - 4,373,485
Total 2,498,719 1,874,766 - 4,373,485
Financial liabilities at fair value through profit or loss
Forward currency trades - 69,558 - 69,558
Total - 69,558 - 69,558
Company
Level 1 Level 2 Level 3 Total
30th June 2022 £ £ £ £
Investment in other non-current financial assets - 1,818,167 - 1,818,167
Total - 1,818,167 - 1,818,167
Level 1 Level 2 Level 3 Total
30th June 2021 £ £ £ £
Investment in other non-current financial assets - 1,874,766 - 1,874,766
Total - 1,874,766 - 1,874,766
Level 3
Level 3 assets as at 30th June 2022 are nil (2021: nil).
Where there is an impairment in the investment in own funds, the loss is
reported in the income statement. No impairment was recognised during the
period or the preceding year.
The fair value gain on the forward currency trades is offset in the income
statement by the foreign exchange losses on other currency assets and
liabilities held during the period and at the period end. The net loss
reported for the period is £519,633 (2021: net loss £60,607).
(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 2022, the Group had net asset balances of US$23,917,936 (2021:
US$9,211,328), offset by forward sales totalling US$24,500,000 (2021:
US$8,300,000). Other significant net asset balances were C$499,036 (2021:
C$648,301), and SGD1,736,510 (2021: SGD1,924,212).
Had the US dollar strengthened or weakened against sterling as at 30th June
2022 by 10%, with all other variables held constant, the Group's net assets
would have increased or decreased (respectively) by less than 1%, 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 categorised as unlisted
investments, and in other listed investments, the market price risk is managed
through diversification of the portfolio. A 10% increase or decrease in the
price level of the funds' relevant benchmarks, with all other variables held
constant, would result in an increase or decrease of approximately £0.3
million in the value of the investments and profit before tax.
The Group's International REIT and Global Equity CEF funds have been
consolidated as controlled entities, and therefore the securities held by the
funds are reported in the consolidated statement of financial position under
investments. At 30th June 2022, all those securities were listed on a
recognised exchange. A 10% increase or decrease in the price level of the
securities would result in a gain or loss respectively of approximately £0.4
million to the Group.
The Group is also exposed to market risk indirectly via its Funds under
Management, from which its fee income is derived. To hedge against potential
losses in fee income, the Group may look to invest in securities or
derivatives that should increase in value in the event of a fall in the
markets. The purchase and sale of these securities 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 profit from hedging recognised in the Group income statement for the
period is £nil (2021: £nil).
(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 and US 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 2022, the
Group held £22,677,893 (2021: £25,514,619) in cash balances, of which
£19,381,084 (2021: £23,911,707) 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 operating subsidiary company in the UK, 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 Group will produce its first Internal
Capital and Risk Assessment (ICARA) in FY 2023. The objective of this is to
ensure that the Group has adequate capital to enable it to manage risks which
are not adequately covered under the Pillar 1 requirements. This process
includes stress testing for the effects of major risks, such as a significant
market downturn, and includes an assessment of the Group's ability to mitigate
the risks.
12 POST BALANCE SHEET EVENTS
There have been no material events occurring between the balance sheet date
and the date of signing this report.
APPENDIX
1. Key risks
The Board has conducted a robust assessment of the principal risks facing the
Group, including those that would threaten its business model, future
performance, solvency or liquidity. This assessment includes continuous
monitoring of both internal and external environments to identify new and
emerging risks, which in turn are analysed to determine how they can best be
mitigated and managed. The primary risk is the potential for loss of FuM as a
result of poor investment performance, client redemptions, a breach of mandate
guidelines or market volatility. The Group seeks to attract and retain clients
through consistent outperformance supplemented by first class client
servicing.
In addition to the above key business risk, the Group has outlined what it
considers to be its other principal risks, including the controls in place and
any mitigating factors.
Principal risk Controls / mitigation
Key person risk Risk that key employees across the business leave/significant reliance on a Team approach, internal procedures, knowledge sharing. Remuneration packages
small number of key employees. reviewed as needed to ensure talent/key employees
are retained.
Technology, IT / cybersecurity and business continuity risks Risk that technology systems and support are inadequate or fail to adapt to IT monitors developments in this area and ensures that systems are adequately
changing requirements; systems are vulnerable to third party penetration or protected. Additional IT spend has resulted in a number of ongoing systems
that the business cannot continue in a disaster. vulnerability testing that has taken place on the network, along with ongoing
monitoring of the network to reduce our vulnerabilities. The Group actively
maintains a Disaster Recovery/Business Continuity plan. All offices maintain
backups of all local servers, applications and data. The US replicates its
backup to the UK cloud provider and vice versa. Employees across its four
offices are able to work remotely, accessing information and maintaining
operations.
Material error / mandate breach Risk of a material error or investment mandate breach occurring. Mandate guidelines are coded (where possible) into the order management system
by the Investment Management/Compliance teams of each operating subsidiary.
Regulatory and legal risk Risk of legal or regulatory action resulting in fines, penalties, censure or Compliance teams of each subsidiary monitor relevant regulatory developments -
legal action arising from failure to identify or meet regulatory and both new regulations as well as changes to existing regulations that impact
legislative requirements in the jurisdictions in which the Group and its their respective subsidiary. Implementation is done as practicably as possible
operating subsidiaries operate, including those as a result of being a listed taking into account the size and nature of the business.
entity on the London Stock Exchange. Risk that new regulation or changes to
the interpretation of existing regulation affects the Group's operations and The finance team keeps abreast of any changes to Listing Rules, accounting and
cost base. other standards that may have an impact on the Group.
Finance and both the compliance teams receive regular updates from a variety
of external sources including regulators, law firms, consultancies etc.
2. Related party transactions
In the ordinary course of business, the Company and its subsidiary
undertakings carry out transactions with related parties as defined under IAS
24 Related Party Disclosures. Material transactions are set out below.
(i) Transactions with key management personnel
Key management personnel are defined as Directors (both Executive and
Non-Executive) of City of London Investment Group PLC.
(a) Details of compensation paid to the Directors as well as their
shareholdings in the Group is provided in the Remuneration report on pages 68,
76 and 77 and in note 4 of the full report.
(b) One of the Group's subsidiaries manages funds for some of its key
management personnel, for which it receives a fee. All transactions between
key management and their close family members and the Group's subsidiary are
on terms that are available to all employees of that Company. The amount
received in fees during the year was £58,232 (2021: £39,300). There were no
fees outstanding as at the year end.
(ii) Summary of transactions and balances
During the period, the Company received from its subsidiaries £11,840,471
(2021: £11,154,306) in respect of management service charges and dividends of
£26,160,323 (2021: £12,200,000).
Amounts outstanding between the Company and its subsidiaries as at 30th June
2022 are given in notes 15 and 16 of the full report.
M Dwyer, a Director of the Company until 30th June 2022, is also a Director of
the World Markets Umbrella Fund plc, a fund managed by City of London
Investment Management Company Ltd. The management fees earned by the Group
during the year from this fund totalled £1,082,662 (2021: £1,092,575), with
£92,295 (2021: £117,128) outstanding at the year end.
3. Statement of Directors' responsibilities
The Directors are responsible for preparing the Strategic report, the
Directors' report, the Directors' remuneration report, the separate Corporate
governance statement and the Financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare Group and Company financial
statements for each financial year. The Directors have elected under Company
law and are required under the Listing Rules of the Financial Conduct
Authority to prepare Group financial statements in accordance with UK-adopted
International Accounting Standards. The Directors have elected under Company
law to prepare the Company financial statements in accordance with UK-adopted
International Accounting Standards.
The Group and Company financial statements are required by law and UK-adopted
International Accounting Standards to present fairly the financial position of
the Group and the Company and the financial performance of the Group; the
Companies Act 2006 provides in relation to such financial statements that
references in the relevant part of that Act to financial statements giving a
true and fair view are references to their achieving a fair presentation.
Under Company law, the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Group and the Company and of the profit or loss of the Group
for that period.
In preparing each of the Group and Company financial statements, the Directors
are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and accounting estimates that are reasonable and prudent;
- state whether they have been prepared in accordance with UK-adopted
International Accounting Standards; and
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Group and the Company will continue in
business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Group's and the Company's transactions and
disclose with reasonable accuracy at any time the financial position of the
Group and the Company and enable them to ensure that the financial statements
and the Directors' remuneration report comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Group and the
Company and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
Directors' statement pursuant to the Disclosure and Transparency Rules
Each of the Directors, whose names and functions are listed on pages 42 and 45
of the full report confirm that, to the best of each person's knowledge:
- the financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit of the Company and the undertakings included in
the consolidation taken as a whole, and;
- the Strategic Report and Directors' report contained in the Annual Report
includes a fair review of the development and performance of the business and
the position of the Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks and
uncertainties that they face.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the City of London Investment
Group's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
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