CITY OF LONDON INVESTMENT GROUP PLC 16th September 2019
CITY OF LONDON INVESTMENT GROUP PLC (LSE:CLIG)
('City of London' or 'the Group')
FINAL RESULTS FOR THE YEAR TO 30TH JUNE 2019
SUMMARY
- | Funds under management (FuM) at 30th June 2019 were US$5.4 billion (2018: US$5.1 billion), an increase of 6%. In sterling terms, FuM increased by 10% to £4.3 billion (2018: £3.9 billion). |
- | Revenues, representing the Group's management charges on FuM, were £31.9 million (2018: £33.9 million). Profit before tax was £11.4 million (2018: £12.8 million). |
- | Basic earnings per share were 34.9p (2018: 39.5p) after a tax charge of 21% (2018: 21%) of pre-tax profits. |
- | A final dividend of 18p per share is recommended, payable on 29th October 2019 to shareholders on the register on 11th October 2019, making a total for the year of 40.5p (2018: 27p), including the special dividend of 13.5p paid on 22nd March 2019. |
For a copy of the full report or further information, please visit the shareholders page of our website http://www.citlon.co.uk or contact:
Tom Griffith (CEO)
City of London Investment Group PLC
Tel: 001 610 380 0435
Martin R Green
Zeus Capital Limited
Financial Adviser & Broker
Tel: +44 (0)20 3829 5000
CHAIRMAN'S STATEMENT
To coin a phrase more commonly used in the sporting world, the year to June 2019 was very much a 'game of two halves'.
Deepening US/China trade friction in the fourth quarter of 2018 severely impacted equity markets with the S&P 500 plummeting by 20% in the 13 week period to Christmas Eve, while the MSCI Emerging Market Index (MXEF) fell by a more modest 10% over the same period. As trade-related superpower brinkmanship subsided somewhat in the early part of 2019, markets regained their composure with both emerging and developed markets re-tracing back towards their high points for the year, with the MXEF recording a gain of 1.2% for the year as a whole. Notwithstanding the more benign market conditions of recent months, it is clear that equity markets remain highly susceptible to geopolitical influences, be it growing protectionism or ongoing tensions in the Middle East, for example. Suffice it to say that we remain cautiously optimistic that our commitment to deliver above average performance, via the defensive benefits of closed-end fund (CEF) instruments, to a loyal client base is unwavering and will, we believe, continue to serve their interests over the longer term.
Diversification
Shareholders will be aware that for some years past, we have devoted considerable efforts to diversify our asset base within the CEF universe, with product offerings in the Developed, Opportunistic Value (OV) & Frontier strategies, each of which now have established track records over 1, 3 & 5 year periods. In the year to June 2019, these efforts brought their reward with particularly strong inflows into the Developed product, which with its OV companion, now represents 18% of total Funds under Management (FuM), while diversified products overall account for 22% of FuM. In a similar vein and as noted in my interim report, we recruited a specialist Real Estate Investment Trust (REIT) team during 2018 and, with seed investments totalling US$5million from CLIG, two products were established in January 2019 - a developed (ex-US) REIT and an EM REIT fund. The initial performance of these two funds is encouraging and while it will take some time to create a comparable track record within their REIT peer group, I am pleased to report that they have already secured an initial subscription from a long-standing CLIG client. Despite generally lower revenue margins, the potential to grow these diversification products without capacity constraints offers an important growth path for the Group over the medium to longer term.
Results
The volatile market backdrop made for marked swings in CLIG's FuM during the year with a corresponding effect on revenues. While the aforementioned Developed inflows, particularly in the second half of the year, enabled us to finish the FY 2019 with a 6% YOY increase in FuM to just under US$5.4 billion, the average FuM across the year as a whole was down by 3% to US$5.1 billion. As the mix of our business continues to diversify, it is inevitable that the blended margin will continue to fall slightly, as witnessed by a 5% reduction this year to 76bp. These twin headwinds of market disruption in the first half and margin erosion resulted in an 11% fall in pre-tax profits to £11.4 million for the year, with earnings per share down 12% to 34.9p. Total expenses for the year rose by 1% due mainly to the addition of the REIT team and additional costs associated with the Employee Incentive Plan (EIP), each of which represents an 'investment' in future business and employee tenure. Tight cost controls remain a hallmark of CLIG's profit and loss account with the cost/income ratio still at a very healthy 43%. Encouragingly, the combination of new inflows and healthier markets have helped run-rate profitability recover more recently to the levels of FY 2018 and we are hopeful that, in the absence of extreme market gyrations, the current year will see a return to profit growth.
Dividends
Your Board attaches great importance to providing shareholders with a generous but stable flow of dividends, balanced by a policy of prudential capital management. To this end, we have for some years adhered to a dividend cover ratio of 1.2:1 based on rolling 5-year periods, using accumulated retained earnings to address any short term profit swings that derive from emerging market volatility. In conjunction with this policy, it is the Board's intention that as and when retained earnings build up over time and in the absence of other capital commitments, any excess accumulated capital can be distributed by way of special one-off dividends and we were pleased to be able to adopt this policy in the current year with the payment of a 13.5p special dividend in March. Taken together with our proposed unchanged final dividend of 18p, this will bring total distributions to shareholders in respect of the year to June 2019 to 40.5p. Based on the proposed regular dividend payments of 27p for this year, the rolling cover ratio will remain within our policy guidelines at 1.24:1 (excluding unrealised investment gains) while the Group remains debt-free.
Board
Shareholders will be very aware that our founder and long-standing CEO, Barry Olliff, had for some time past signalled his intention to retire at the end of 2019. In anticipation of this important milestone, the Board formulated a management transition plan in 2018, which culminated in the appointment of Tom Griffith as CEO and Mark Dwyer as Group CIO on 1st March 2019. These appointments underline the Board's priority of providing continuity in the management of the business, as evidenced by the fact the three remaining executive directors, Tom, Mark and our Finance director, Tracy Rodrigues, have served CLIG for an aggregate 53 years. I am pleased to report that with just a few months before Barry's retirement date, the transition plan has progressed smoothly.
Earlier this year, Mark Driver, who had been a non-executive director (NED) of the Company for the last three years, indicated his wish to resign from the Board due to increasing business commitments elsewhere and I would like to extend my thanks and appreciation to Mark for his constructive and valuable contribution as a director of the Company over this period. Peter Roth's appointment to replace Mark brings our NED complement back to four and, importantly, provides an equal balance between US & UK-based NEDs, as well as providing us with more diverse skill-sets at Board level.
Barry Olliff
CLIG traces its roots to Olliff & Partners, a London-based broker established by Barry in (1987) to specialise in closed-end investment trusts, a market sector in which he had already accumulated more than 20 years experience. Recognising the opportunities available in the expanding universe of CEFs in the emerging markets, the CLIG Group was formed, offering its first product in 1991 and as a specialist manager CLIG grew rapidly through the 1990's, attracting clients in both the US and the UK. Despite the cyclical volatility that has occurred sporadically since those early days, CLIG has adhered resolutely to a value-driven and prudential approach to CEF investment on behalf of a loyal client base throughout its history. This track record is very largely the result of one man's commitment to a business which he built from scratch nearly 30 years ago. The global CEF sector is a relatively small part of the broader equity market universe but, within that sector, Barry Olliff has been a pioneer, making an outstanding contribution not only to the development of CEFs to a wider investor audience but also in blazing a trail of high standards in corporate governance and transparency in the management of client assets. Few can match Barry's pre-eminence in the investment world and CLIG is fortunate to have had his stewardship and guidance for so long. On behalf of all clients, shareholders and employees, I would like to thank him for his distinguished contribution to the Company. While Barry will be resigning from the Board effective 31st December 2019, he intends to remain available as an adviser to the Group for the following two years to ensure appropriate continuity. I know I speak for the whole Board in wishing him the very best in his well-deserved retirement. He will be missed.
Outlook
While volatility appears likely to remain the order of play in the coming months, your Board remains firmly of the view that the CLIG business model, wedded to a prudent and long term approach to CEF investment, will continue to reward all stakeholders through above average performance, stable dividends and a working environment offering opportunity. Although there are capacity constraints in key areas of our investment universe, we will continue to invest in and explore all opportunities for growth. Our ambition is to be the 'go-to' manager within the wider CEF universe as we believe that this specialist segment offers the best prospect of value creation for the CLIG stakeholder community.
This year our AGM is to be held at our Gracechurch Street offices on Monday 21st October and I do encourage all shareholders to join us at the meeting. Following the formal business of the meeting, your directors look forward to the opportunity of meeting you individually. In the meantime, I do encourage all stakeholders to read the rest of this report as I firmly believe that it continues to provide a high level of relevant information and transparency in the day-to-day conduct of your Company.
http://www.rns-pdf.londonstockexchange.com/rns/3601M_1-2019-9-15.pdf
Barry Aling
Chairman
12th September 2019
START OF STRATEGIC REPORT
CHIEF EXECUTIVE OFFICER'S STATEMENT
When I first began to write this report, it occurred to me how daunting a task it is to follow an industry innovator and successful business Founder. I then recalled a phrase that Barry would say to me frequently over the years, 'Just tell it like it is.' And so, here 'it is'…
As part of a transition process that has been planned for the last five years, on 1st March 2019 Barry Olliff took a step towards his planned retirement by transitioning the CEO and Group CIO positions that he has held since founding the Group in 1991 to me and Mark Dwyer, respectively. Barry remains involved with daily activity providing guidance and support as necessary. He will remain on the CLIG Board until his retirement on 31st December 2019. Thereafter, Barry intends to act in an advisory capacity for at least two years providing continuity throughout the transition and beyond.
Barry has built a successful and enduring business, based on Constant Improvement, which is now positioned for further success. We intend to achieve this while remaining true to the three stakeholders in our business - Clients, Shareholders and Employees.
From the standpoint of Employees, while Barry has historically provided the leadership and vision for the Group, I believe that he would say that his colleagues at CLIG have been instrumental in achieving CLIG's success, and that he has confidence in our collective ability going forward. The team of people that manage and operate your Company are as deep, experienced and committed as I have seen during my 19+ years at the Group. We have a proven operating model and as the old adage says 'if it ain't broke, don't fix it'.
History suggests that management transitions from a business Founder have a low percentage of success. The difference in this transition from other company management changes is that this is an Evolution, not a Revolution. There is a strong management team and a wealth of experienced employees within both Investment Management and the Operational areas of the Group. In addition, and as noted by Barry in his Interim Review earlier this year, Carlos Yuste has rejoined the Group as the Head of Business Development bolstering the depth and experience of management to continue developing the business. Prior to his departure in 2015, Carlos was the Executive Director in charge of Business Development.
While the upcoming retirement of a business Founder presents certain challenges, we are well prepared and feel that this is business as usual. Shareholders seem to have echoed this view through a display of confidence leading to a stable, and even rising, CLIG share price during this transitional period. To all of our shareholders, we thank you for the level of support you have shown.
We will continue down the path that Barry has established in the transformation from a single to multi-product business, thus diversifying our sources of revenue and improving the quality of our earnings. We will remain focused on investment performance. We will continue to support and build the diversification strategies. And, we will remain focused on costs and the operating leverage that exists in the Group. Notwithstanding the transition, we continue to look for further diversification opportunities.
Our Clients remain a primary focus. The diversification products have gained significant traction. Our Clients understand that we have not lost Barry's experience. Rather, we are building upon the strong foundation he created.
As Barry has mentioned relative to his own CLIG share ownership on previous occasions, albeit on a much smaller scale, any wealth that I may have is invested in shares of CLIG. I am fully committed to the continued value creation of CLIG shares now and into the future.
Finally, on a personal note, I imagine that it must be hard for the Founder of a business to turn over his creation, passion and life's work to the next generation. To Barry's credit, he has done so with pride, grace and dignity, although I continue to sense the passion that he has for the business and the industry. It is this passion he applies to every aspect of his work that I believe is at the core of his success. Although he is not yet gone, Barry Olliff (2 L's, 2 F's, no E) should know that he will be greatly missed.
FuM flows
As you will be aware from our trading update, the EM & Frontier strategies experienced net outflows of US$205 million over the financial year due primarily to clients rebalancing their equity exposure. The Developed and Opportunistic Value products experienced net inflows over the same period of US$301 million.
The pace of flows into the Developed strategy accelerated in the second half of the financial year with US$158 million of the US$253 million invested. The strategy ended the fiscal year with a FuM increase of 52% at US$729 million, and continues into the new fiscal year with over US$100 million of new commitments. Combined, the Developed and Opportunistic Value strategies ended the year just under US$1 billion and approach 20% of the FuM managed by the Group across all strategies.
Investment performance
In prior CEO reports we provided insights into the reasons our Emerging Markets (EM) products lagged the benchmark over the 12-month period ended June 2018. This underperformance resulted from widening discounts and, to a lesser extent, poor NAV performance from the underlying closed-end funds (CEFs) in which we invest. These discounts remained stubbornly wide into the 4th quarter of 2018, at which point emerging markets sentiment began to improve resulting in significant narrowing of discounts through 30th June 2019.
This mean reversion of discounts towards average historical levels, in combination with good country allocation and recently improved performance from the underlying CEF's NAVs, has led to a period of strong investment performance through 30th June 2019.
As at 30th June 2019 our representative EM composite has demonstrated 1st or 2nd quartile annualised performance over 1, 3 and 5-year periods.
CLIG KPI
In the Half Year Report 2018/19, Barry Olliff announced the planned change of our primary Key Performance Indicator (KPI). As a result of changes in the public companies that we felt were our reasonable competitors and, more importantly, changes in our own mix of business, we have moved away from comparing our Total Return (T/R) to that of our peers. We have instead adopted the following two primary 'Share Price' KPIs:
- | Compound the T/R of a CLIG share, through a cycle, by 7.5% to 12.5%, on an Annualised basis. |
-- OR -- | |
- | Double the Cumulative T/R of M1EF, through a cycle, where M1EF is the most relevant Emerging Markets Index. |
As these are new KPIs, we would like to be transparent regarding how the data would have looked historically, as that look-back provides good context for future measurement. The Annualised T/R of a CLIG share was 14.0% since the initial listing date 12th April 2006 through 30th June 2019 thus outpacing the target range of 7.5 to 12.5%, while that of M1EF for the same period was 7.0%. Since the initial listing date, the Cumulative T/R of 467.1% for a CLIG share compares to 145.9% for M1EF.
KPIs are expected to stretch management, but not in a manner that would put undue risk on our shareholders. We believe these two 'Share Price' KPIs are valid metrics, and our goal remains to achieve one of the two over a rolling 5-year period. We look forward to reporting on our progress in future communications.
Closed-end fund corporate governance
The Eleventh Edition of CLIM's Statement on Corporate Governance and Proxy Voting Policy for Closed-End Funds was published in August 2019. This document was first published in 1999 in an attempt to identify and support 'best practice' in the governance of CEFs, as well as to lay out our Core Values. While initially the document was focused on CEFs that offered predominantly Emerging Market exposure, as our business has grown and diversified, so has our focus on corporate governance across the CEF spectrum. Our approach to governance and voting is consistent across the CEF strategies. The revised document is available on our website.
One development that transpired since we published the (prior) Tenth Edition of this statement in 2016 is that a more openly assertive approach was adopted specifically in the US from March 2017 in response to discounts that had widened materially across the US EM CEF sector. When we determined that Boards were not going to act to address the underlying problems, we took steps to protect our clients' interests. We have long highlighted the differences between UK and US corporate governance norms and practices, but March 2017 marked a point where those differences became extreme. To a large extent, the divergence is now less pronounced because US Boards got the message that discounts must be managed via control of the supply of outstanding shares, due partly to growing pressure from low cost ETFs offering similar exposure. In the UK, Boards continue to be more engaged with investors and typically more focused on longer-term investment performance when determining whether the supply of a CEF is in line with demand.
China Fund
As an update to the reference in the Half Year Report 2018/2019 regarding our involvement with the China Fund (CHN US), our engagement resulted in the Board's implementation of both enhanced investment management techniques and best practice in CEF corporate governance.
Per the Chairman's Statement in the Fund's 2019 Interim Report, CHN's investment performance has been good thus far; the Board has been reduced from seven to three Directors; the change in custody, accounting and administration services are estimated to have yielded savings exceeding $700,000 per year; travel-related expenses have been reduced through eliminating unnecessary trips to Asia and through greater use of technology-enabled communications, and; legal fees were reduced via negotiation of an annual contract price for recurrent business. Annual savings for CHN shareholders, absent the extraordinary legal costs incurred in 2018, are estimated at US$1.3 million per year. Compared to 2018, when overall expenses were seriously inflated by legal and proxy-related expenses as the prior entrenched Board fought CLIG's competing proxy, the savings amount to US$2.8 million.
CLIG FuM and fee income
Funds under Management (FuM) increased considerably over the half year (US$4.6 billion as of 31st December 2018) and ended the year higher than last (US$5.4 billion at 30th June 2019 versus US$5.1 billion at 30th June 2018), but net fee income decreased from £31.6 million in the previous year to £29.9 million for year-end 30th June 2019. This reduction in revenue is as a result of: 1) the significant downturn in markets in the last calendar quarter of 2018; and 2) FuM lost in Emerging Market products being replaced by lower fee rates in our Diversification products.
CLIG expenses
While we had intended to make some cost reductions at the end of the half year, circumstances changed significantly in the second half of the financial year. At December month end, FuM was at US$4.6 billion looking as if we were headed below US$4.5 billion and possibly lower. Instead, at June month end we were at US$5.4 billion looking more like we were headed upwards through US$5.5 billion. Under these changed set of circumstances, our approach was adjusted to account for the change in market conditions. Monthly costs were held between £1.0 million and £1.1 million per month.
Diversification products
The REIT Team has settled in and the two new funds (International and Emerging Markets) launched 1st January 2019 now have a 6-month performance track record. We are encouraged by performance thus far and remain optimistic about raising assets in the medium term. A three year (or even potentially five-year) record will be necessary to gain significant traction with a number of clients and consultants in the US market.
As mentioned previously, the Developed and Opportunistic Value products gained significant traction this year. As the Opportunistic Value strategy track record approaches the 5-year mark, there is the potential for greater acceptance of the product by clients and consultants over the next 12 months. More information on all the Diversification products is available in the Business Development section.
Cash, dividends and CLIG diversification
In addition to maintaining the dividend this year at 27p (9p Interim, 18p Final), the CLIG Board approved a special distribution of 13.5p per share. Also, share buybacks of 301,000 shares purchased at a weighted average price of £3.86 were completed in the market when there appeared to be good opportunities to buy shares cheaply.
Inclusive of our regulatory and statutory capital requirements, there is £13.8 million in the bank in addition to the seed investment of US$5 million that was made into the two REIT funds in January 2019. This level of cash allows us the flexibility to continue considering corporate diversification opportunities that could enhance the Group's earnings and share price.
EIP
The Employee Incentive Plan (the EIP), approved by shareholders in 2016, has been a success in terms of increasing employee ownership of CLIG shares with over 60% of staff participating in the plan. Fiscal year end 30th June 2020 is the final year for the shareholder approved 5% allocation of pre-bonus, pre-tax, operating profits to cover the charge of the Bonus Share Awards. Thereafter, these awards will fall within the 30% limit of the existing profit-share pool.
Brexit
At the time of writing, the outcome of the Brexit process is unclear. The extent to which CLIG will be impacted is thus clouded by this uncertainty, but the trans-Atlantic nature of the Group gives us some confidence in the face of these circumstances. We are fortunate that the preponderance of our client base are US institutions which will be only tangentially affected by fallout from a potential 'no deal' Brexit.
Barry Olliff intended CLIG share sales
In keeping with Barry's previous statements, I would like to remind shareholders of his intentions regarding share sales. As he approaches retirement on 31st December 2019, Barry intends to sell 500,000 shares at each of 450p, 475p, and 500p subject to close periods, etc.
We believe that this statement of Barry's intentions should continue in order to maintain the openness and accountability with shareholders that he has provided over the years and leading up to his retirement.
CLIG outlook
The Investment Management team is experienced and has been very stable. Our Emerging Market products have out-performed their relative benchmarks, and our Diversification products continue to gain traction and diversify our source of income.
Management of the Company have worked together for a number of years and through multiple market cycles. Many of us have grown up together within a partnership environment and are to a great extent a homogeneous unit.
While there is always room for improvement, I would suggest that as a team, we are optimistic regarding the future of CLIG.
Tom Griffith
Chief Executive Officer
12th September 2019
BUSINESS DEVELOPMENT REVIEW
Overview
Long-term investment performance in the emerging markets closed-end fund (CEF) strategy remains strong, with first or second quartile results versus manager peers over the 3 and 5 year rolling periods ending 30th June 2019.
There were new inflows of $164 million in our core emerging market strategies, which were countered by outflows of $348 million, leading to net outflows of $184 million as clients rebalanced after strong gains in emerging markets over the first half of 2019.
Fundraising in the diversification products resulted in inflows of $398 million and outflows of $118 million for a net gain of $280 million. Net inflows by product were $253 million in Developed Markets strategies, and $48 million in Opportunistic Value strategies, which were countered by net outflows in Frontier of $21 million.
Diversification products now represent circa 22% of Group Assets Under Management (AUM), compared with 18% last year. These additional assets will assist in efforts to raise the profile of our extension CEF products with institutional consultants and plan sponsors.
Net inflows of approximately $140 million are confirmed for the new financial year.
Products
Continued client and consultant interest in our Developed and Opportunistic Value CEF products resulted in assets growing in these strategies by 52% and 34%, respectively, over the year.
The Developed Markets CEF Strategy utilises our experience with closed-end funds in our core Emerging Markets strategy to provide exposure to global developed markets.
Opportunistic Value CEF Strategy, formerly known as Global Tactical Asset Allocation CEF Strategy, was renamed as it encompasses a variety of asset classes via closed-end funds and adopts a go anywhere approach. While this is a separate team from the team managing client assets in the emerging markets, both teams use the same methodology and internal operational resources. Both taxable and tax-exempt products are available.
The Frontier Emerging Markets CEF Strategy, which is an extension of the Emerging Markets core equity product focusing on the smallest or pre-emerging markets with high growth potential.
We recently added a Real Estate Investment Trust (REIT) team that will focus on emerging market and global REITs, a complementary area with similarities to closed-end funds.
Performance
The core EM strategy outperformed (by approximately 300 bps, net of fees) for the full year as discounts narrowed and country allocation was positive. The Developed, Opportunistic Value and Frontier strategies all recorded negative relative performance due to a combination of negative NAV and country allocation effects.
The Global Emerging Markets Composite investment returns for the rolling one year ending 30th June 2019 were 3.89% vs. 1.21% for the MSCI Emerging Markets Index in USD and 0.98% for the S&P Emerging Frontier Super BMI Index in USD.
The Global Developed Composite investment returns for the rolling one year ending 30th June 2019 were -2.09% vs. 1.29% for the MSCI ACWI ex US in USD.
The Frontier Markets Composite investment returns for the rolling one year ending 30th June 2019 were -8.91% vs. 10.74% for the S&P Frontier EM 150 benchmark in USD.
The Opportunistic Value Composite investment returns for the rolling one year ending 30th June 2019 were 1.85% vs. 6.16% 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 Developed and Opportunistic Value capabilities will be the focus of our product diversification and business development activities.
FINANCIAL REVIEW
Group income statement and statement of comprehensive income
The Group's gross revenue comprises management fees charged as a percentage of Funds under Management (FuM). FuM at 30th June 2019 were US$5.4 billion compared with US$5.1 billion at the end of last year, as a result of net inflows of US$0.1 billion and outperformance in our Emerging Market (EM) strategy. Even though FuM ended the year on a high, the average FuM for the current and prior years were US$5.1 billion and US$5.2 billion respectively, a decrease of c.3%.
The Group's gross revenue is down year on year by approximately 6% to £31.9 million (2018: £33.9 million). This is primarily due to general fee erosion and the mix of business, with the non-Emerging Market strategies, which attract lower fees, now representing 22% of FuM (2018: 18%). As this shift from EM to the diversified strategies continues it is to be expected that there will be a further decline in the weighted average fee rate. As an offset, revenue was bolstered by sterling weakening against the US dollar, with an average USD/GBP rate of 1.29 this year compared with 1.35 last year.
Commissions payable of £0.8 million (2018: £1.2 million) relates to fees due to third party marketing agents for the introduction of clients. The contract to which all but a small proportion of these commissions relate expired in October 2010. Under the agreement, commission is based on a period of ten years from the date of the client's initial investment. Consequently, next year will to all intents and purposes be the final year and based on current FuM levels, clients and exchange rates, the expected commissions would be in the region of £0.2 million.
The Group's net fee income, after custody charges of £1.3 million (2018: £1.2 million), is £29.9 million (2018: £31.6 million), down 6% on last year. As a weighted average percentage of FuM, net fee income is currently around 76 basis points compared to 80 basis points at the end of last year.
The overheads for the year amount to £12.9 million (2018: £12.5 million), which is up 4% on last year, and results in a cost-income ratio of 43% (2018: 39%), arrived at by comparison to net fee income. The largest component of overheads continues to be staff related at £8.4 million (2018: £7.5 million). The net effect of joiners and leavers was to increase costs by £0.6 million. The most significant joiners were the new REIT team and the Head of Business Development with the leavers mostly administration staff. The mid-year salary increase was de-minimis but the full effect of last year's mid-year increase resulted in an additional cost of £0.1 million. The balance of the increase in staff costs of £0.2 million relates to sterling weakening against the US dollar.
Total net income less overheads results in a profit of £17.0 million (2018: £19.2 million) to which the 30% profit-share is applied, which including payroll related taxes amounted to £5.6 million (2018: £6.1 million).
The Employee Incentive Plan (EIP) charges amounted to £0.9 million (2018: £0.5 million) which is within the 5% (2018: <3%) of profit before bonus approved by shareholders. This 5% limit is in place until the end of the next financial year, thereafter the cost of the EIP will fall within the 30% profit-share pool.
Investment income of £0.8 million (2018: £0.2 million) primarily relates to the unrealised gains on the Group's seed investments in its two new REIT funds, launched at the start of January 2019. It also includes the unrealised gains relating to minority third party interests in the REIT funds (£0.2 million).
The pre-tax profit of £11.4 million (2018: £12.8 million), after a corporation tax charge this year of £2.4 million (2018: £2.7 million), at an effective rate of 21% (2018: 21%), results in a post-tax profit of £9.0 million (2018: £10.1 million), of which £8.8 million is attributable to equity shareholders of the Company.
With the adoption of IFRS 9 this year there is now very little going through other comprehensive income, essentially only foreign exchange gains or losses on non-monetary assets. Previously the fair value movement on investments held would have been taken to other comprehensive income but now they flow directly through the income statement, as detailed in the notes to the accounts.
Group statement of financial position
The Group's financial position continues to be strong and liquid with cash resources of £13.8 million accounting for 62% of net assets (2018: £19.7 million, 92%).
The Group invested US$5 million (£3.9 million) seeding its two new REIT funds at the start of January 2019. By the end of June 2019 that investment was valued at £4.5 million, with the unrealised gain taken through the income statement.
The Group is required to report under International Financial Reporting Standards (IFRS) which outline the basis of consolidation. Where the Group holds seed investments in funds that it manages there are a number of factors which determine if those investments should be consolidated or not. The Group's two new REIT funds were assessed to be under the Group's control and therefore consolidated. These funds are consolidated on a line by line basis in the statement of financial position and include third party investments, collectively known as the non-controlling interest (NCI).
Other components of non-current assets are:
•property and equipment of £0.7 million (2018: £0.5 million), capitalised software licences of £0.2 million (2018: 0.3 million) representing an increased investment in IT systems and equipment of £0.1 million plus £0.3 million on the refurbishment of the London office following the renewal of its ten year lease, offset by the depreciation charge for the year of £0.3 million; and
•a deferred tax asset of £0.4 million (2018: £0.1 million) which is an estimate of the future corporation tax savings to be derived from the exercise of share options in issue at the financial year end plus timing differences on when a deduction can be taken on the EIP awards granted in the US.
The principal increase in liabilities relates to the employee waived profit-share in respect of participation in the EIP, £0.6 million. These funds are held on account until such time the awards vest or are forfeited. On vesting they will offset the loan to the Employee Benefit Trust (EBT). On forfeiture the lower of the waived bonus or the market value of the deferred shares at that time will be paid to the employee. 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 15% of those shares that vested were sold in order to help cover the employees' resulting tax liabilities, leading to a very healthy 85% share retention within the Group.
Following the vesting, £0.4 million was offset against the loan to the EBT, funded equally by the employee waived profit-share account and the EIP share reserve account, the latter being the Company matching element. In addition, Directors and employees exercised 164,605 (2018: 220,487) options over shares held by the EBT, raising £0.5 million (2018: £0.6 million) which was also used to pay down part of the loan to the EBT.
The EBT purchased 307,982 shares (2018: 227,742 shares) at a cost of £1.2 million (2018: £1.0 million) in preparation for the annual EIP awards due at the end of October 2019.
Dividends paid during the year totalled £10.2 million (2018: £6.6 million). The total dividend of 40.5p per share comprised: the 18p final dividend for 2017/18, the 9p interim dividend for the current year plus a special dividend of 13.5p per share (2018:17p final for 2016/17, 9p interim, special nil). The Group's dividend policy is set out on page 16.
The Group also took the opportunity to use some of its surplus cash to fund the buy-back and cancellation of 301,000 shares at a weighted average price of £3.86, totalling £1.2 million. The impact of the reduction of shares in issue was to increase earnings per share by 0.6%.
The Group is well capitalised and its regulated entities complied at all times with their local regulatory capital requirements. In the UK the Group's principal operating subsidiary, City of London Investment Management Company Ltd, is regulated by the FCA. As required under the Capital Requirements Directive, the underlying risk management controls and capital position are disclosed on our website www.citlon.co.uk.
Currency exposure
The Group's revenue is almost entirely US dollar based whilst its costs are incurred in US dollars, sterling and to a lesser degree Singapore dollars and UAE dirhams. The table presented aims to illustrate the effect of a change in the US dollar/sterling exchange rate on the Group's post-tax profits at various FuM levels, based on the assumptions given, which are a close approximation of the Group's current operating parameters. You can see from the illustration that a change in exchange rate from 1.30 to 1.20 on FuM of US$5.0 billion increases post-tax profits by £1.0 million.
FX/Post-tax profit Matrix: Illustration of US$/£ rate effect
FuM US$bn: | 4.5 | 5.0 | 5.5 | 6.0 | 6.5 |
US$/£ | Post -tax, £m | ||||
1.10 | 8.9 | 10.7 | 12.5 | 14.2 | 16.0 |
1.15 | 8.4 | 10.1 | 11.8 | 13.5 | 15.2 |
1.20 | 7.9 | 9.6 | 11.2 | 12.8 | 14.4 |
1.25 | 7.5 | 9.1 | 10.6 | 12.2 | 13.7 |
1.30 | 7.1 | 8.6 | 10.1 | 11.6 | 13.1 |
The above table is intended to illustrate the approximate impact of movement of USD / £, given an assumed set of trading conditions.
It is not intended to be interpreted or used as a profit forecast.
Assumes:
1. Average net fee 76 bp's
2. Annual operating costs £5m plus US$9m plus S$1m (£1 = S$1.8)
3. Profit-share 30%
4. EIP 5%
5. Average tax rate 21%
It is worth noting though that while the Group's fee income is assessed by reference to FuM expressed in US dollars, the underlying investments are primarily in emerging market related stock, and therefore the US dollar market value is sensitive to the movement in the US dollar rate against the currencies of the underlying countries.
To a degree this provides a natural hedge against the movement in the US dollar given that as the US dollar weakens (strengthens) against these underlying currencies the value of the FuM in US dollar terms rises (falls).
The Group's currency exposure also relates to its non-sterling assets and liabilities, which are again to a great extent in US dollars. The exchange rate differences arising on their translation into sterling for reporting purposes each month is recognised in the income statement. In order to minimise the foreign exchange impact the Group monitors its net currency position and offsets it by forward sales of US dollars for sterling. At 30th June 2019 these forward sales totalled US$6.8 million, with a weighted average exchange rate of US$1.30 to £1 (2018: US$9.0 million at a weighted average rate of US$1.38 to £1).
Viability statement
In accordance with the provisions of the UK Corporate Governance Code, the Directors have assessed the viability of the Group, taking into account the Group's current position and prospects, Internal Capital Adequacy Assessment Process (ICAAP) and principal risks, as detailed in the Risk Management report in the full Financial Statements.
The ICAAP is reviewed by the Board semi-annually and incorporates a series of stress tests on the Group's financial position over a three year period. It is prepared to identify and quantify the Group's risks and level of capital which should be held to cover those risks.
Based on the results of this analysis, the Board confirms it has a reasonable expectation that the Company and the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years.
While the Directors have no reason to believe that the Group will not be viable over a longer period, any future assessments are subject to a level of uncertainty that increases with time. The Board have therefore determined that a three year period constitutes an appropriate timeframe for its viability assessment.
END OF STRATEGIC REPORT
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 30TH JUNE 2019
Note | Year to 30th June 2019 £ | Year to 30th June 2018 £ | |
Revenue Gross fee income | 5 | 31,933,229 | 33,930,846 |
Commissions payable | (751,523) | (1,159,580) | |
Custody fees payable | (1,327,296) | (1,164,477) | |
Net fee income | 29,854,410 | 31,606,789 | |
Administrative expenses Staff costs | 14,789,754 | 14,066,857 | |
Other administrative expenses | 4,254,383 | 4,717,139 | |
Depreciation and amortisation | 306,445 | 294,799 | |
(19,350,582) | (19,078,795) | ||
Operating profit | 6 | 10,503,828 | 12,527,994 |
Interest receivable and similar gains* | 7 | 893,731 | 264,501 |
Profit before taxation | 11,397,559 | 12,792,495 | |
Income tax expense | 8 | (2,352,275) | (2,732,152) |
Profit for the period | 9,045,284 | 10,060,343 | |
Profit attributable to: Non-controlling interests (NCI) | 246,374 | - | |
Equity shareholders of the parent | 8,798,910 | 10,060,343 | |
Basic earnings per share | 9 | 34.9p | 39.5p |
Diluted earnings per share | 9 | 34.1p | 39.3p |
* The Group has initially applied IFRS 9 at 1st July 2018. Under the transition method chosen, comparative information has not been restated.
CONSOLIDATED AND COMPANY STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30TH JUNE 2019
Group Company
Year to 30th June 2019 £ | Year to 30th June 2018 £ | Year to 30th June 2019 £ | Year to 30th June 2018 £ | ||||||
Profit for the period | 9,045,284 | 10,060,343 | 10,773,474 | 9,888,536 | |||||
Items which may be reclassified through the profit or loss: Fair value gains on available-for-sale investments* | - | 1,694 | - | 1,826 | |||||
Release of fair value gains on disposal of available-for-sale investments*/** | - | (154,384) | - | (153,819) | |||||
Foreign exchange gains/(losses) on non-monetary assets | 6,124 | (20,884) | - | - | |||||
Other comprehensive income/(loss) | 6,124 | (173,574) | - | (151,993) | |||||
Total comprehensive income for the period | 9,051,408 | 9,886,769 | 10,773,474 | 9,736,543 | |||||
Attributable to: Equity shareholders of the parent | 8,805,034 | 9,886,769 | 10,773,474 | 9,736,543 | |||||
Non-controlling interests | 246,374 | - | - | - | |||||
* Net of deferred tax. ** The Group has initially applied IFRS 9 at 1st July 2018. Under the transition method chosen, comparative information has not been restated. | |||||||||
CONSOLIDATED AND COMPANY STATEMENT OF FINANCIAL POSITION
30TH JUNE 2019
Group Company
Note | 30th June 2019 £ | 30th June 2018 £ | 30th June 2019 £ | 30th June 2018 £ | |
Non-current assets | |||||
Property and equipment | 670,048 | 450,241 | 414,555 | 125,917 | |
Intangible assets | 193,465 | 292,037 | 33,043 | 47,333 | |
Other financial assets | 7,699,491 | 38,170 | 5,168,562 | 1,069,930 | |
Deferred tax asset | 380,234 | 119,078 | 27,021 | 40,011 | |
8,943,238 | 899,526 | 5,643,181 | 1,283,191 | ||
Current assets | |||||
Trade and other receivables | 5,979,448 | 5,833,160 | 8,998,886 | 14,397,266 | |
Other financial assets | 126,754 | 195,112 | 126,754 | 195,112 | |
Current tax receivable | - | - | 2,121,430 | 835,385 | |
Cash and cash equivalents | 13,813,089 | 19,704,111 | 146,836 | 225,806 | |
19,919,291 | 25,732,383 | 11,393,906 | 15,653,569 | ||
Current liabilities | |||||
Trade and other payables | (5,766,484) | (4,801,433) | (4,546,423) | (3,843,071) | |
Current tax payable | (692,840) | (361,021) | - | - | |
Creditors, amounts falling due within one year | (6,459,324) | (5,162,454) | (4,546,423) | (3,843,071) | |
Net current assets | 13,459,967 | 20,569,929 | 6,847,483 | 11,810,498 | |
Total assets less current liabilities | 22,403,205 | 21,469,455 | 12,490,664 | 13,093,689 | |
Non-current liabilities | |||||
Deferred tax liability | (116,441) | (3,221) | (3,221) | (3,221) | |
Net assets | 22,286,764 | 21,466,234 | 12,487,443 | 13,090,468 | |
Capital and reserves | |||||
Share capital | 10 | 265,607 | 268,617 | 265,607 | 268,617 |
Share premium account | 2,256,104 | 2,256,104 | 2,256,104 | 2,256,104 | |
Investment in own shares | (5,029,063) | (4,699,115) | (5,029,063) | (4,699,115) | |
Fair value reserve* | - | 13,731 | - | 13,731 | |
Share option reserve | 299,011 | 372,762 | 299,011 | 372,762 | |
EIP share reserve | 1,015,316 | 605,707 | 1,015,316 | 605,707 | |
Foreign exchange reserve | 94,379 | 88,255 | - | - | |
Capital redemption reserve | 26,107 | 23,097 | 26,107 | 23,097 | |
Retained earnings* | 19,953,375 | 22,537,076 | 13,654,361 | 14,249,565 | |
Shareholders interest | 18,880,836 | 21,466,234 | 12,487,443 | 13,090,468 | |
Non-controlling interest | 3,405,928 | - | - | - | |
Total equity | 22,286,764 | 21,466,234 | 12,487,443 | 13,090,468 |
* The Group has initially applied IFRS 9 at 1st July 2018. Under the transition method chosen, comparative information has not been restated.
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 £10,773,474 (2018: £9,888,536).
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
30TH JUNE 2019
Share capital £ | Share premium account £ | Investment in own shares £ | Fair value reserve £ | Share option reserve £ | EIP Share reserve £ | Foreign exchange reserve £ | Capital redemption reserve £ | Retained earnings £ | Total attributable to share- holders £ | Non- controlling interest £ | Total £ | |
At 30th June 2017 | 268,617 | 2,256,104 | (4,355,887) | 166,421 | 442,379 | 101,497 | 109,139 | 23,097 | 19,069,725 | 18,081,092 | - | 18,081,092 |
Profit for the period | - | - | - | - | - | - | - | - | 10,060,343 | 10,060,343 | - | 10,060,343 |
Comprehensive income | - | - | - | (152,690) | - | - | (20,884) | - | - | (173,574) | - | (173,574) |
Total comprehensive income | - | - | - | (152,690) | - | - | (20,884) | - | 10,060,343 | 9,886,769 | - | 9,886,769 |
Transactions with owners | ||||||||||||
Share option exercise | - | - | 637,799 | - | (83,312) | - | - | - | 83,312 | 637,799 | - | 637,799 |
Purchase of own shares | - | - | (981,027) | - | - | - | - | - | - | (981,027) | - | (981,027) |
Share-based payment | - | - | - | - | 13,695 | 504,210 | - | - | - | 517,905 | - | 517,905 |
Deferred tax on share options | - | - | - | - | - | - | - | - | (100,430) | (100,430) | - | (100,430) |
Current tax on share options | - | - | - | - | - | - | - | - | 50,204 | 50,204 | - | 50,204 |
Dividends paid | - | - | - | - | - | - | - | (6,626,078) | (6,626,078) | - | (6,626,078) | |
Total transactions with owners | - | - | (343,228) | - | (69,617) | 504,210 | - | - | (6,592,992) | (6,501,627) | - | (6,501,627) |
At 30th June 2018 as previously reported | 268,617 | 2,256,104 | (4,699,115) | 13,731 | 372,762 | 605,707 | 88,255 | 23,097 | 22,537,076 | 21,466,234 | - | 21,466,234 |
Adjustment on initial application of IFRS 9* | - | - | - | (13,731) | - | - | - | - | 13,731 | - | - | - |
Adjusted balance at 1st July 2018 | 268,617 | 2,256,104 | (4,699,115) | - | 372,762 | 605,707 | 88,255 | 23,097 | 22,550,807 | 21,466,234 | - | 21,466,234 |
Profit for the period | - | - | - | - | - | - | - | - | 8,798,910 | 8,798,910 | 246,374 | 9,045,284 |
Comprehensive income | - | - | - | - | - | - | 6,124 | - | - | 6,124 | - | 6,124 |
Total comprehensive income | - | - | - | - | - | - | 6,124 | - | 8,798,910 | 8,805,034 | 246,374 | 9,051,408 |
Transactions with owners | ||||||||||||
NCI Investment | - | - | - | - | - | - | - | - | - | - | 3,159,554 | 3,159,554 |
Share option exercise | - | - | 515,187 | - | (71,994) | - | - | - | 71,994 | 515,187 | - | 515,187 |
Purchase of own shares | - | - | (1,234,621) | - | - | - | - | - | - | (1,234,621) | - | (1,234,621) |
Share cancellation | (3,010) | - | - | - | - | - | - | 3,010 | (1,165,789) | (1,165,789) | - | (1,165,789) |
Share-based payment | - | - | - | - | (1,757) | 606,799 | - | - | - | 605,042 | - | 605,042 |
EIP vesting/forfeiture | - | - | 389,486 | - | - | (197,190) | - | - | - | 192,296 | - | 192,296 |
Deferred tax on share options | - | - | - | - | - | - | - | - | (100,091) | (100,091) | - | (100,091) |
Current tax on share options | - | - | - | - | - | - | - | - | 16,372 | 16,372 | - | 16,372 |
Dividends paid | - | - | - | - | - | - | - | (10,218,828) | (10,218,828) | - | (10,218,828) | |
Total transactions with owners | (3,010) | - | (329,948) | - | (73,751) | 409,609 | - | 3,010 | (11,396,342) | (11,390,432) | 3,159,554 | (8,230,878) |
At 30th June 2019 | 265,607 | 2,256,104 | (5,029,063) | - | 299,011 | 1,015,316 | 94,379 | 26,107 | 19,953,375 | 18,880,836 | 3,405,928 | 22,286,764 |
* The Group has initially applied IFRS 9 at 1st July 2018. Under the transition method chosen, comparative information has not been restated.
COMPANY STATEMENT OF CHANGES IN EQUITY
30TH JUNE 2019
Share capital £ | Share premium account £ | Investment in own shares £ | Fair value reserve £ | Share option reserve £ | EIP share reserve £ | Capital redemption reserve £ | Retained earnings £ | Total attributable to shareholders £ | |
At 30th June 2017 | 268,617 | 2,256,104 | (4,355,887) | 165,724 | 442,379 | 101,497 | 23,097 | 10,945,371 | 9,846,902 |
Profit for the period | - | - | - | - | - | - | - | 9,888,536 | 9,888,536 |
Comprehensive income | - | - | - | (151,993) | - | - | - | - | (151,993) |
Total comprehensive income | - | - | - | (151,993) | - | - | - | 9,888,536 | 9,736,543 |
Transactions with owners | |||||||||
Share option exercise | - | - | 637,799 | - | (83,312) | - | - | 46,014 | 600,501 |
Purchase of own shares | - | - | (981,027) | - | - | - | - | - | (981,027) |
Share-based payment | - | - | - | - | 13,695 | 504,210 | - | - | 517,905 |
Deferred tax on share options | - | - | - | - | - | - | - | (25,286) | (25,286) |
Current tax on share options | - | - | - | - | - | - | - | 21,008 | 21,008 |
Dividends paid | - | - | - | - | - | - | -- | (6,626,078) | (6,626,078) |
Total transactions with owners | - | - | (343,228) | - | (69,617) | 504,210 | - | (6,584,342) | (6,492,977) |
At 30th June 2018 as previously reported | 268,617 | 2,256,104 | (4,699,115) | 13,731 | 372,762 | 605,707 | 23,097 | 14,249,565 | 13,090,468 |
Adjustment on initial application of IFRS 9* | - | - | - | (13,731) | - | - | - | 13,731 | - |
Adjusted balance at 1st July 2018 | 268,617 | 2,256,104 | (4,699,115) | - | 372,762 | 605,707 | 23,097 | 14,263,296 | 13,090,468 |
Profit for the period | - | - | - | - | - | - | - | 10,773,474 | 10,773,474 |
Comprehensive income | - | - | - | - | - | - | - | - | - |
Total comprehensive income | - | - | - | - | - | - | - | 10,773,474 | 10,773,474 |
Transactions with owners | |||||||||
Share option exercise | - | - | 515,187 | - | (71,994) | - | - | 33,155 | 476,348 |
Purchase of own shares | - | - | (1,234,621) | - | - | - | - | - | (1,234,621) |
Share cancellation | (3,010) | - | - | - | - | - | 3,010 | (1,165,789) | (1,165,789) |
Share-based payment | - | - | - | - | (1,757) | 606,799 | - | - | 605,042 |
EIP vesting/forfeiture | - | - | 389,486 | - | - | (197,190) | - | - | 192,296 |
Deferred tax on share options | - | - | - | - | - | - | - | (35,460) | (35,460) |
Current tax on share options | - | - | - | - | - | - | - | 4,513 | 4,513 |
Dividends paid | - | - | - | - | - | - | - | (10,218,828) | (10,218,828) |
Total transactions with owners | (3,010) | - | (329,948) | - | (73,751) | 409,609 | 3,010 | (11,382,409) | (11,376,499) |
At 30th June 2019 | 265,607 | 2,256,104 | (5,029,063) | - | 299,011 | 1,015,316 | 26,107 | 13,654,361 | 12,487,443 |
* The Group has initially applied IFRS 9 at 1st July 2018. Under the transition method chosen, comparative information has not been restated
CONSOLIDATED AND COMPANY CASH FLOW STATEMENT
FOR THE YEAR ENDED 30TH JUNE 2019
Note | 30th June 2019 £ | 30th June 2018 £ | 30th June 2019 £ | 30th June 2018 £ | |
Cash flow from operating activities | |||||
Operating profit | 10,503,828 | 12,527,994 | 321,873 | 276,936 | |
Adjustments for: | |||||
Profit on disposal of assets | (240) | - | (240) | - | |
Depreciation charges | 204,601 | 200,332 | 103,167 | 83,394 | |
Amortisation of intangible assets | 101,844 | 94,467 | 14,290 | 6,914 | |
Share-based payment (credit)/charge | (1,757) | 13,695 | (237) | 3,042 | |
EIP-related charge | 793,036 | 504,210 | 396,111 | 246,715 | |
Translation adjustments | (24,646) | 100,657 | (16,244) | 47,621 | |
Cash generated from operations before changes | |||||
in working capital | 11,576,666 | 13,441,355 | 818,720 | 664,622 | |
(Increase)/decrease in trade and other receivables | (80,825) | 24,735 | 5,398,380 | (6,148,484) | |
Increase in trade and other payables | 975,184 | 1,398,752 | 895,560 | 2,623,193 | |
Cash generated from/(used in) operations | 12,471,025 | 14,864,842 | 7,112,660 | (2,860,669) | |
Interest received | 87,749 | 47,105 | 5 | 187 | |
Interest paid | 1,118 | 8,615 | - | - | |
Taxation paid | (2,252,111) | (2,818,992) | (1,415,000) | (253,292) | |
Net cash generated from/(used in) operating activities | 10,307,781 | 12,101,570 | 5,697,665 | (3,113,774) | |
Cash flow from investing activities | |||||
Dividends received from subsidiaries | - | - | 10,600,000 | 9,400,000 | |
Purchase of property and equipment and intangibles | (421,316) | (136,903) | (391,565) | (95,634) | |
Proceeds from sale of property and equipment | - | - | - | - | |
Purchase of non-current financial assets | (7,088,847) | (2,272) | (3,920,338) | (2,272) | |
Proceeds from sale of non-current financial assets | - | 1,654 | - | 71 | |
Purchase of current financial assets | (21,078) | (151,467) | (21,078) | (151,467) | |
Proceeds from sale of current financial assets | 57,064 | 978,356 | 57,064 | 978,356 | |
Net cash (used in)/generated from investing activities | (7,474,177) | 689,368 | 6,324,083 | 10,129,054 | |
Cash flow from financing activities | |||||
Ordinary dividends paid | 11 | (10,218,828) | (6,626,078) | (10,218,828) | (6,626,078) |
Purchase and cancellation of own shares | (1,165,789) | - | (1,165,789) | - | |
Purchase of own shares by employee share option trust | (1,234,621) | (981,027) | (1,234,621) | (981,027) | |
Proceeds from sale of own shares by employee | |||||
share option trust | 515,186 | 637,799 | 515,186 | 637,799 | |
Capital from non-controlling interest | 3,150,599 | - | - | - | |
Net cash used in financing activities | (8,953,453) | (6,969,306) | (12,104,052) | (6,969,306) | |
Net increase in cash and cash equivalents | (6,119,849) | 5,821,632 | (82,304) | 45,974 | |
Cash and cash equivalents at start of period | 19,704,111 | 13,936,558 | 225,806 | 180,938 | |
Cash held in funds* | 217,091 | - | - | - | |
Effect of exchange rate changes | 11,736 | (54,079) | 3,334 | (1,106) | |
Cash and cash equivalents at end of period | 13,813,089 | 19,704,111 | 146,836 | 225,806 |
*Cash held in REIT funds consolidated on a net asset basis
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 2019 and 30th June 2018 does not constitute statutory accounts and has been extracted from the full accounts for the years ended 30th June 2019 and 30th June 2018. 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 2018 have been filed with the Registrar of Companies. The accounts for the year ended 30th June 2019 will be delivered to the Registrar of Companies in due course.
City of London Investment Group PLC (the 'Company') is a public limited company which listed on the London Stock Exchange on 29th October 2010 and is domiciled and incorporated in the United Kingdom under the Companies Act 2006.
1 BASIS OF PREPARATION
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The Group financial statements have been prepared under the historical cost convention, except for certain financial assets held by the Group that are reported at fair value. The Group and Company financial statements have been prepared on a going concern basis.
New 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.
IFRS 9 Financial Instruments
The Group adopted IFRS 9 from 1st July 2018. This standard replaces the classification and measurement models for financial instruments in IAS 39 with three classification categories for financial assets: amortised cost, fair value through profit or loss and fair value through other comprehensive income and two classification categories for financial liabilities: amortised cost or fair value through profit and loss. The Group's business model and contractual cash flows arising from its investments in financial instruments determine the classification. Equity instruments will be recorded at fair value, with gains or losses reported either in the income statement or through equity. However, where fair value gains and losses are recorded through equity there will no longer be a requirement to transfer gains or losses to the Income statement on impairment or disposal.
IFRS 9 also introduces an expected credit loss model for the assessment of impairment. 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.
IFRS 15 Revenue from Contracts with Customers
The Group adopted IFRS 15 from 1st July 2018. The standard deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised when a customer obtains control of goods or services and thus has the ability to direct the use and obtain the benefits from the goods or service. The standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations.
The Group has applied the cumulative catch up approach and therefore prior comparatives have not been restated. Any adjustments arising on transition are recognised in opening equity. As a result the comparative information provided continues to be accounted for in accordance with the Group's previous accounting policy.
The impact on the financial performance and position of the Group from the adoption of these standards is detailed in note 4.
The following standard is relevant to the Group but is not yet mandatory:
IFRS 16 Leases
The standard requires a lessee to recognise lease assets and liabilities, currently accounted for as operating leases, on the statement of financial position and recognise amortisation of the lease assets and interest on the lease liabilities over the term of the lease. On transition, a lessee may elect not to apply the requirements to leases for which the lease term ends within 12 months of the date of initial application.
This standard is effective for annual periods beginning on or after 1st January 2019, so applicable to the Group from 1st July 2019. One of the Group's leases will expire within 12 months from the date of initial application of the standard and therefore on transition the Group will continue to account for it as an operating lease until such time it expires. For those leases that will be recognised as a right-of-use asset and related lease liability, the Group estimates the discounted value of those lease commitments to be approximately £2.3 million based on current discount values and foreign exchange rates.
No other standards or interpretations issued and not yet effective are expected to have an impact on the Group's consolidated financial statements.
Accounting estimates and assumptions
The preparation of these financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Whilst estimates are based on management's best knowledge and judgement using information and financial data available to them, the actual outcome may differ from those estimates.
The most significant area of the financial statements that are subject to the use of estimates and assumptions are noted below:
Share-based payments
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, the Group is required to estimate the fair value of the EIP awards due to be granted in October 2019. 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.
2 BASIS OF CONSOLIDATION
These financial statements consolidate the financial statements of the Company and all of its subsidiary undertakings. The Group's subsidiaries are those entities which it directly or indirectly controls. Control over an entity is evidenced by the Group's ability to exercise its power in order to affect any variable returns that the Group is exposed to through its involvement with the entity.
When assessing whether to consolidate an entity, the Group evaluates a range of control factors as defined under IFRS 10, namely:
- | the purpose and design of the entity |
- | the relevant activities and how these are determined |
- | whether the Group's rights result in the ability to direct the relevant activities |
- | whether the Group has exposure or rights to variable returns |
- | whether the Group has the ability to use its power to affect the amount of its returns |
Subsidiaries are consolidated from the date on which control is transferred to the Group and are deconsolidated from the date that control ceases.
The Group's subsidiary undertakings as at 30th June 2019 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 Emerging Markets REIT Fund * International REIT Fund * | Holding company Delaware Statutory Trust Fund Delaware Statutory Trust Fund | 100% 52%** 100%** | UK USA 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 |
*Emerging Markets REIT Fund and International REIT Fund, both have a year-end of 31st December. As both of these funds have a financial year end that differs from that of the Company, they are consolidated based on their net asset value as at 30th June 2019.
**Controlling interest is based on the interest held directly and with a related party.
The registered address of all the UK incorporated companies is 77 Gracechurch Street, London EC3V 0AS. The registered office for the two REIT funds is 4005 Kennett Pike, Suite 250, Greenville, DE 19807, USA. The registered address of City of London Investment Management Company (Singapore) PTE Ltd is 20 Collyer Quay, #10-04, Singapore 049319.
City of London Latin America Limited is dormant and as such is not subject to audit.
The consolidated financial statements are prepared on the historical cost basis except for the revaluation of certain financial instruments as outlined in note 3 (iii).
3 SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies adopted are set out below and have, unless otherwise stated, been applied consistently to all periods presented in these financial statements.
(i) Property and equipment
For all property and equipment depreciation is calculated to write off their cost to their estimated residual values by equal annual instalments over the period of their estimated useful lives, which are considered to be:
Short leasehold property improvements -over the remaining life of the lease
Furniture and equipment -4 to 10 years
Computer and telephone equipment -4 to 10 years
(ii) Intangible assets
Intangible assets are capitalised at cost and amortised on a straight line basis over the estimated useful life of the asset. The Group's only intangible assets are computer software licences, which are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. Costs include directly attributable overheads.
The estimated useful lives range from 4 to 10 years.
The assets are reviewed for impairment each year.
Software integral to a related item of hardware equipment is accounted for as property and equipment.
Costs associated with maintaining computer software programs are recognised as an expense when they are incurred.
(iii) Financial instruments
On 1st July 2018 the group adopted IFRS 9 'Financial instruments' which replaced IAS 39 Financial Instruments 'recognition and measurement' and sets out the new requirements for the recognition and measurement of financial instruments. These requirements focus primarily on the classification and measurement of financial instruments and measurement of impairment losses based on an expected loss credit model as opposed to an incurred loss methodology as under IAS 39.
Under IFRS 9 financial assets must be 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 remeasured at fair value, with any movement recognised in the income statement. The fair value of the derivatives held by the Group is determined as follows:
Shares | -priced using the quoted market mid price* |
Options | -priced using the quoted market bid price |
Forward currency trades | -priced using the forward exchange bid rates from Bloomberg |
*The funds managed by the Group are valued at the mid price in accordance with US GAAP. Therefore, where the Group has identified investments in those funds as subsidiaries, the fair value consolidated is the net asset values as provided by the administrator of the funds. The underlying investments in these funds are 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 12-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 12 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.
IFRS 9 also introduces an expected credit loss model for the assessment of impairment. 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.
(iv) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits with an original maturity of three months or less from inception, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
(v) Trade payables
Trade payables are measured at initial recognition at fair value and subsequently measured at amortised cost.
(vi) 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.
(vii) Share-based payments
The Company operates an Employee Incentive Plan (EIP) which is open to all employees in the Group. Awards are made to participating employees over shares under the EIP where they have duly waived an element of their annual profit-share before the required waiver date, in general before the start of the relevant financial year.
The Awards are made up of two elements: Deferred Shares and Bonus Shares. The Deferred Shares represent the waived profit-share and the Bonus Shares represent the additional award made by the Company as a reward for participating in the EIP. Awards will vest (i.e. no longer be forfeitable) over a three year period with one-third vesting each year.
The full cost of the Deferred Shares is recognised in the year to which the profit-share relates. The value of the Bonus Shares is expensed on a straight line basis over the period from the date the employees elect to participate to the date that the awards vest. This cost is estimated during the financial year and at the point when the actual award is made, the share-based payment charge is re-calculated and any difference is taken to the profit or loss.
Prior to the implementation of the EIP, the Company operated an Employee Share Option Plan. The fair value of the employee services received in exchange for share options is recognised as an expense. The fair value has been calculated using the Binomial pricing model, and has then been expensed on a straight line basis over the vesting period, based on the Company's estimate of the number of shares that will actually vest. At the end of the three year period when the actual number of shares vesting is known, the share-based payment charge is re-calculated and any difference is taken to the profit or loss.
(viii) 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. 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.
(ix) Commissions payable
A portion of the Group's revenue is subject to commission's payable under third party marketing agreements. Commissions payable are recognised in the same period as the revenue to which they relate.
(x) Foreign currency translation
Foreign currency transactions are translated using the exchange rates prevailing at the transaction date. Monetary assets held in a currency other than the functional currency are translated at the end of each financial period at the period end closing rates.
The functional currency of the Group's main trading subsidiaries, City of London Investment Management Company Limited and City of London US Services Limited, is US dollars. The functional currency of City of London Investment Group PLC (the 'Company') is sterling. The Group uses sterling as the presentation currency. Under IAS 21 this means that exchange differences caused from translating the functional currency to presentational currency for the main trading subsidiaries would be recognised in equity. However, the Group operates a policy whereby it manages the exposure of foreign exchange positions of its subsidiaries 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 subsidiaries 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.
(xi) Leases
The cost of operating leases is charged to the income statement in equal periodic instalments over the period of the leases.
(xii) Pensions
The Group operates defined contribution pension schemes covering the majority of its employees. The costs of the pension schemes are charged to the income statement as they are incurred. Any amounts unpaid at the end of the period are reflected in other creditors.
4 IMPACT DUE TO CHANGES IN ACCOUNTING POLICIES
Adoption of IFRS 9 Financial Instruments
As explained in note 1, the Group has adopted IFRS 9 which resulted in a change in accounting policies and adjustments to the amount recognised in the financial statements.
In accordance with the transitional provisions of IFRS 9, comparative figures have not been restated.
IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and liabilities.
Classification and measurement of financial instruments
The Group has assessed that its investment in funds that it manages and designated as available for sale financial assets (AFS) under IAS 39, where any gains or losses on the changes in their fair value which were included in other comprehensive income (FVOCI), no longer meet this criteria with the adoption of IFRS 9. The new standards concept is that financial assets should be classified and measured at fair value, with changes in fair values recognised in the profit and loss (FVTPL) as they arise.
The total impact on the Group's equity due to the re-classification and measurement of financial instruments as at 1st July 2018 is as follows:
Effect on fair value reserve | Effect on retained earnings | ||
Note | £ | £ | |
Closing balance - IAS 39 as at 30th June 2018 | 13,731 | 22,537,076 | |
Reclassify investments from FVOCI to FVTPL | a | (13,731) | 13,731 |
Opening balance - IFRS 9 as at 1st July 2018 | - | 22,550,807 |
On 1st July 2018, the Group's management has assessed which business models apply to the financial assets held by the Group at the date of initial application of IFRS 9 and has classified its financial instruments into the appropriate IFRS 9 categories. The main effects resulting from this reclassification are as follows:
Financial assets | Note | Loans and receivables £ | Amortised cost £ | FVTPL £ | Available for sale FVOCI £ | Total financial assets £ |
Closing balance - IAS 39 | ||||||
as at 30th June 2018 | 24,836,049 | - | 195,112 | 38,170 | 25,069,331 | |
Reclassify loans and receivables to amortised cost | (24,836,049) | 24,836,049 | - | - | - | |
Reclassify investments from AFS FVOCI to FVTPL | a | - | - | 38,170 | (38,170) | - |
Opening balance - IFRS 9 as at 1st July 2018 | - | 24,836,049 | 233,282 | - | 25,069,331 | |
Note
a: Investments in own funds were reclassified from FVOCI to FVTPL (£38,170). Related fair value gains of £13,731 (net of deferred tax) were transferred from the available for sale fair value reserve to retained earnings on 1st July 2018.
Reclassification of financial assets and liabilities on adoption of IFRS 9
On the date of initial application, 1st July 2018, the financial assets and liabilities of the Group were as follows with any reclassifications noted:
Classification category Carrying amount
Original - IAS 39 | New - IFRS 9 | £ | £ | |
Non‐current financial assets Investment in own funds | FVOCI | FVTPL | 38,170 | 38,170 |
Current financial assets Trade and other receivables | Loans and | Amortised | ||
receivables | cost | 5,131,938 | 5,131,938 | |
Listed investments | FVTPL | FVTPL | 195,112 | 195,112 |
Cash and cash equivalents | Loans and | Amortised | ||
receivables | cost | 19,704,111 | 19,704,111 | |
Current financial liabilities Trade and other payables | FVTPL | FVTPL | 264,790 | 264,790 |
Financial liabilities | Loans and | Amortised | ||
receivables | cost | 4,413,011 | 4,413,011 |
The impact of the above changes have been reflected in the opening balance of the financial position of the consolidated entity at 1st July 2018 as the cumulative catch up approach has been applied. No adjustments have been made to the prior year reported numbers.
As at 30th June 2018, there were no impairment losses recorded in relation to the financial assets of the Group. The introduction of the expected credit loss model for the assessment of impairment does not have any impact on the Group's results.
COMPANY
The total impact on the Company's equity due to the re-classification and measurement of financial instruments as at 1st July 2018 is as follows:
Effect on fair value reserve | Effect on retained earnings | ||
Note | £ | £ | |
Closing balance - IAS 39 as at 30th June 2018 | 13,731 | 14,249,565 | |
Reclassify investments from AFS FVOCI to FVTPL | a | (13,731) | 13,731 |
Opening balance - IFRS 9 as at 1st July 2018 | - | 14,263,296 |
Reclassification of the Company's financial assets under IFRS 9 are as follows:
Financial assets | Note | Investment in subsidiaries £ | Loans and receivables £ | Amortised cost £ | FVTPL £ | Available for sale FVOCI £ | Total financial assets £ |
Closing balance - IAS 39 | |||||||
as at 30th June 2018 | 1,031,760 | 14,353,342 | - | 195,112 | 38,170 | 15,618,384 | |
Reclassify loans and receivables to amortised cost | - | (14,353,342) | 14,353,342 | - | - | - | |
Reclassify investments from AFS FVOCI to FVTPL | a | - | - | - | 38,170 | (38,170) | - |
Opening balance - IFRS 9 as at 1st July 2018 | 1,031,760 | - | 14,353,342 | 233,282 | - | 15,618,384 | |
Note
a: Investments in own funds were reclassified from FVOCI to FVTPL (£38,170). Related fair value gains of £13,731 (net of deferred tax) were transferred from the available for sale fair value reserve to retained earnings on 1st July 2018.
Reclassification of financial assets and liabilities on adoption of IFRS 9
On the date of initial application, 1st July 2018, the financial assets and liabilities of the Company were as follows with any reclassifications noted:
Classification category | Carrying amount |
Original - IAS 39 | New - IFRS 9 | £ | £ | |
Non‐current financial assets Investment in own funds | FVOCI | FVTPL | 1,069,930 | 1,069,930 |
Current financial assets Trade and other receivables | Loans and | Amortised | ||
receivables | cost | 14,127,536 | 14,127,536 | |
Listed investments | FVTPL | FVTPL | 195,112 | 195,112 |
Cash and cash equivalents | Loans and | Amortised | ||
receivables | cost | 225,806 | 225,806 | |
Current financial liabilities Trade and other payables | FVTPL | FVTPL | 2,579 | 2,579 |
Financial liabilities | Loans and | Amortised | ||
receivables | cost | 3,752,976 | 3,752,976 |
The impact of the above changes have been reflected in the opening balance of the financial position of the Company at 1st July 2018 as the cumulative catch up approach has been applied. No adjustments have been made to the prior year reported numbers.
On adoption of IFRS 9, the expected loss model did not change the carrying values of the Group's assets.
Adoption of IFRS 15 Revenue from Contracts with Customers
The Group has adopted IFRS 15 with effect from 1st July 2018. Following the standard's five stage approach in determining how and when to recognise revenue there is no material impact on the Group's results or a material change to the estimation of management fees.
5 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 2019 | ||||||
Gross fee income | 29,577,509 | 1,035,215 | 379,197 | 941,308 | - | 31,933,229 |
Non-current assets: | ||||||
Property and equipment | 255,493 | - | 381,726 | - | 32,829 | 670,048 |
Intangible assets | 160,422 | - | 33,043 | - | - | 193,465 |
Year to 30th June 2018 | ||||||
Gross fee income | 31,334,283 | 968,724 | 453,443 | 1,174,396 | - | 33,930,846 |
Non-current assets: | ||||||
Property and equipment | 324,324 | - | 85,907 | - | 40,010 | 450,241 |
Intangible assets | 244,704 | - | 47,333 | - | - | 292,037 |
The Group has classified its fee income based on the domicile of its clients and non-current assets based on where the assets are held. Any individual client generating revenue of 10% or more would be disclosed separately, as would assets in a foreign country if they were material.
6 | OPERATING PROFIT | Year to | Year to |
The operating profit is arrived at after charging: | 30th June 2019 £ | 30th June 2018 £ | |
Depreciation of owned assets | 204,601 | 200,332 | |
Amortisation of intangible assets | 101,844 | 94,467 | |
Auditors' remuneration: | |||
- Statutory audit | 88,016 | 89,399 | |
- Audit related assurance services | 9,050 | 8,348 | |
- (Over)/Under-accrual of prior year audit fees | (6,417) | 1,276 | |
Operating lease rentals: | |||
- Land and buildings | 444,936 | 434,469 |
7 INTEREST RECEIVABLE AND SIMILAR GAINS | ||
Year to 30th June 2019 £ | Year to 30th June 2018 £ | |
Interest on bank deposit | 87,749 | 47,105 |
Unrealised gain on investments | 848,652 | 298,534 |
Unrealised loss on hedging investments | (43,788) | (89,753) |
Interest receivable/(payable) on restated US state tax returns | 1,118 | 8,615 |
893,731 | 264,501 |
8 | TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES | Year to | Year to |
(a) Analysis of tax charge on ordinary activities: | 30th June 2019 £ | 30th June 2018 £ | |
Tax at 19% (2018: 19%) based on the profit for the period | 2,042,012 | 2,465,715 | |
Double taxation relief | (677,912) | (853,093) | |
Deferred tax on share options and investments | 52,798 | (79,552) | |
Adjustments in respect of prior years | 76,279 | (11,818) | |
Domestic tax total | 1,493,177 | 1,521,252 | |
Foreign tax for the current period | 902,276 | 1,195,561 | |
Deferred Tax on EIP | (300,825) | - | |
Adjustments in respect of prior years | 257,647 | 15,339 | |
Foreign tax total | 859,098 | 1,210,900 | |
Total tax charge in income statement | 2,352,275 | 2,732,152 |
(b) Factors affecting tax charge for the current period:
The tax assessed for the period is different to that resulting from applying the standard rate of corporation tax in the UK - 19% (prior year - 19%). The differences are explained below:
Year to 30th June 2019 £ | Year to 30th June 2018 £ | |
Profit on ordinary activities before tax | 11,397,559 | 12,792,495 |
Tax at 19% (2018: 19%) thereon | (2,165,536) | (2,430,574) |
Effects of: | ||
Unrelieved overseas tax | (224,364) | (342,468) |
Expenses not deductible for tax purposes | (6,732) | (11,757) |
Gains not eligible for tax | 160,031 | - |
Capital allowances more than/(less than) depreciation | 22,306 | (38,884) |
Prior period adjustments | (333,926) | (3,521) |
Deferred tax on share based payments and investments | 248,027 | 79,552 |
Other | (52,081) | 15,500 |
Total tax charge in income statement | (2,352,275) | (2,732,152) |
9 EARNINGS PER SHARE
The calculation of earnings per share is based on the profit attributable to shareholders of the parent for the period of £8,798,910 (2018: £10,060,343) divided by the weighted average number of ordinary shares in issue for the period ended 30th June 2019 of 25,203,147 (2018: 25,456,382).
The Employee Benefit Trust held 1,532,548 ordinary shares in the Company as at 30th June 2019. The Trustees of the Trust have waived all rights to dividends associated with these shares. In accordance with IAS 33 the ordinary shares held by the Employee Benefit Trust have been excluded from the calculation of the weighted average number of ordinary shares in issue.
The calculation of diluted earnings per share is based on the profit attributable to shareholders of the parent for the period of £8,798,910 (2018: £10,060,343) divided by the diluted weighted average number of ordinary shares for the period ended 30th June 2019 of 25,816,823 (2018: 25,617,939).
Reconciliation of the figures used in calculating basic and diluted earnings per share: | 30th June 2019 | 30th June 2018 |
Number of shares | Number of shares | |
Weighted average number of shares - basic earnings per share | 25,203,147 | 25,456,382 |
Effect of dilutive potential shares - share options | 84,514 | 161,557 |
Effect of share awards under the EIP | 529,162 | - |
Weighted average number of shares - diluted earnings per share | 25,816,823 | 25,617,939 |
10 SHARE CAPITAL | 30th June 2019 | 30th June 2018 |
Group and Company | £ | £ |
Allotted, called up and fully paid | ||
At start of period 26,861,707 (2018: 26,861,707) Ordinary shares of 1p each | 268,617 | 268,617 |
Shares repurchased and cancelled 301,000 (2018: Nil) | (3,010) | - |
At end of period 26,560,707 (2018: 26,861,707) Ordinary shares of 1p each | 265,607 | 268,617 |
The share capital represents the nominal value of shares that have been issued. Fully paid ordinary shares carry one vote per share and carry a right to dividends.
11 DIVIDEND | 30th June 2019 | 30th June 2018 |
£ | £ | |
Dividends paid: | ||
Interim dividend of 9p per share (2018: 9p) | 2,270,070 | 2,295,452 |
Special dividend 13.5p per share (2018: nil) | 3,405,105 | - |
Final dividend in respect of year ended: | ||
30th June 2018 of 18p per share (2017: 17p) | 4,543,653 | 4,330,626 |
10,218,828 | 6,626,078 |
A final dividend of 18p per share has been proposed, payable on 29th October 2019, subject to shareholder approval, to shareholders who are on the register of members on 11th October 2019.
12 FINANCIAL INSTRUMENTS
The Group's financial assets include cash and cash equivalents, investments and other receivables. Its financial liabilities include accruals and other payables. The fair value of the Group's financial assets and liabilities is materially the same as the book value.
(i) Financial instruments by category
The tables below show the Group and Company's financial assets and liabilities as classified under IAS39:
Group | Financial assets | Assets at fair value through | ||
30th June 2019 | at amortised cost | profit or loss | Total | |
Assets as per statement of financial position | £ | £ | £ | |
Other financial assets | - | 126,754 | 126,754 | |
Other non-current financial assets | - | 7,699,491 | 7,699,491 | |
Trade and other receivables | 5,260,536 | _ | 5,260,536 | |
Cash and cash equivalents | 13,813,089 | _ | 13,813,089 | |
Total | 19,073,625 | 7,826,245 | 26,899,870 | |
Financial liabilities | Liabilities at | |||
at amortised cost | fair value | |||
£ | through | |||
profit or loss | Total | |||
Liabilities as per statement of financial position | £ | £ | ||
Trade and other payables | 5,538,759 | 95,917 | 5,634,676 | |
Total | 5,538,759 | 95,917 | 5,634,676 | |
Assets at fair | ||||
30th June 2018 | Loans and receivables | value through profit or loss | Available- for-sale | Total |
Assets as per statement of financial position | £ | £ | £ | £ |
Other financial assets | - | 195,112 | 38,170 | 233,282 |
Trade and other receivables | 5,131,938 | - | - | 5,131,938 |
Cash and cash equivalents | 19,704,111 | - | - | 19,704,111 |
Total | 24,836,049 | 195,112 | 38,170 | 25,069,331 |
Financial | Liabilities at | |||
liabilities at | fair value | |||
amortised | through | |||
cost | profit or loss | Total | ||
Liabilities as per statement of financial position | £ | £ | £ | |
Trade and other payables | 4,413,011 | 264,790 | 4,677,801 | |
Total | 4,413,011 | 264,790 | 4,677,801 |
Company | Investment | Financial assets | Assets at fair value through | |||
30th June 2019 | in subsidiaries | at amortised cost | profit or loss | Total | ||
Assets as per statement of financial position | £ | £ | £ | £ | ||
Other financial assets | 1,203,749 | 3,964,813 | 126,754 | 5,295,316 | ||
Trade and other receivables | - | 8,656,208 | - | 8,656,208 | ||
Cash and cash equivalents | - | 146,836 | - | 146,836 | ||
Total | 1,203,749 | 12,767,857 | 126,754 | 14,098,360 | ||
Financial | Liabilities | |||||
liabilities at | at fair value | |||||
amortised | through | |||||
cost | profit or loss | Total | ||||
Liabilities as per statement of financial position | £ | £ | £ | |||
Trade and other payables | 4,438,268 | - | 4,438,268 | |||
Total | 4,438,268 | - | 4,438,268 | |||
Assets at fair | ||||||
30th June 2018 | Investment in subsidiaries | Loans and value through receivables profit or loss | Available- for-sale | Total | ||
Assets as per statement of financial position | £ | £ £ | £ | £ | ||
Other financial assets | 1,031,760 | - 195,112 | 38,170 | 1,265,042 | ||
Trade and other receivables | - | 14,127,536 - | - | - | 14,127,536 | |
Cash and cash equivalents | 1,031,760 | 225,806 - | - | 225,806 | ||
Total | 1,031,760 | 14,353,342 195,112 | 38,170 | 15,618,384 | ||
Financial | Liabilities at | |||||
liabilities at | fair value | |||||
amortised | through | |||||
cost | profit or loss | Total | ||||
Liabilities as per statement of financial position | £ | £ | £ | |||
Trade and other payables | 3,755,555 | - | 3,755,555 | |||
Total | 3,755,555 | - | 3,755,555 | |||
(ii) Fair value measurements recognised in the statement of financial position
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable.
• Level 1: fair value derived from quoted prices (unadjusted) in active markets for identical assets and liabilities.
• Level 2: fair value derived from inputs other than quoted prices included within level 1 that are observable for the assets or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
• Level 3: fair value derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data.
The fair values of the financial instruments are determined as follows:
• Investments for hedging purposes are valued using the quoted bid price and shown under level 1.
• Investments in own funds are determined with reference to the net asset value (NAV) of the fund. Where the NAV is a quoted price the fair value is shown under level 1, where the NAV is not a quoted price the fair value is shown under level 2.
• Forward currency trades are valued using the forward exchange bid rates and are shown under level 2.
The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement.
Group | Level 1 | Level 2 | Level 3 | Total |
30th June 2019 | £ | £ | £ | £ |
Financial assets at fair value through profit or loss | ||||
Investment in other financial assets | 126,754 | - | - | 126,754 |
Investment in other non-current financial assets | 7,655,016 | 44,475 | - | 7,699,491 |
Total | 7,781,770 | 44,475 | - | 7,826,245 |
Financial liabilities at fair value through profit or loss Forward currency trades | - | 95,917 | - | 95,917 |
Total | - | 95,917 | - | 95,917 |
30th June 2018 | Level 1 £ | Level 2 £ | Level 3 £ | Total £ |
Available-for-sale financial assets | ||||
Investment in own funds | - | 38,170 | - | 38,170 |
Total | - | 38,170 | - | 38,170 |
Financial assets at fair value through profit or loss | ||||
Investment in other financial assets | 195,112 | - | - | 195,112 |
Total | 195,112 | - | - | 195,112 |
Financial liabilities at fair value through profit or loss Forward currency trades | - | 264,790 | - | 264,790 |
Total | - | 264,790 | - | 264,790 |
Company | ||||
30th June 2019 | Level 1 £ | Level 2 £ | Level 3 £ | Total £ |
Financial assets at fair value through profit or loss Investment in other financial assets | 126,754 | - | - | 126,754 |
Investment in own funds* | - | 3,964,813 | - | 3,964,813 |
Total | 126,754 | 3,964,813 | - | 4,091,567 |
30th June 2018 | Level 1 £ | Level 2 £ | Level 3 £ | Total £ |
Financial assets at fair value through profit or loss Investment in other financial assets | 195,112 | - | - | 195,112 |
Total | 195,112 | - | - | 195,112 |
Available-for-sale financial assets | ||||
Investment in own funds | - | 38,170 | - | 38,170 |
Total | - | 38,170 | - | 38,170 |
*The Group has initially applied IFRS 9 at 1st July 2018. Under the transition method chosen, comparative information has not been restated.
Level 3
Level 3 assets as at 30th June 2019 are nil (2018: nil).
The Fund establishes valuation processes and procedures to ensure that the valuation techniques for investments that are categorised within Level 3 of the fair value hierarchy are fair, consistent, and verifiable. The Group is responsible for overseeing the implementation of the valuation policies and procedures, which includes the valuation process of the Fund's Level 3 investments.
There were no transfers between any of the levels in the reporting period.
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 £143,082 (2018: net profit £1,480).
(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 2019, the Group had net asset balances of US$6,901,890 (2018: US$5,656,900), offset by forward sales totalling US$6,750,000 (2018: US$9,000,000). Other significant net asset balances were C$493,721 (2018: C$414,997), AED195,544 (2018: AED299,698), and SGD120,583 (2018: SGD249,673).
Had the US dollar strengthened or weakened against sterling as at 30th June 2019 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, the market price risk is managed through diversification of the portfolio. A 10% increase or decrease in the price level of the funds' relevant benchmarks, with all other variables held constant, would not make a material increase or decrease in the value of the investments and profit before tax.
The Group's new REIT funds have been consolidated as controlled entities, and therefore the securities held by those funds are reported in the consolidated statement of financial position under investments. At 30th June 2019, 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 £765,500, of which 57% would be attributable to the Group and 43% to the non-controlling interest.
The Group is also exposed to market risk indirectly via its assets 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 loss from hedging recognised in the Group income statement for the period is £43,788 (2018: £89,753).
(v) Credit risk
The majority of debtors relate to management fees due from funds and segregated account holders. As such the Group is able to assess the credit risk of these debtors as minimal. For other debtors a credit evaluation is undertaken on a case by case basis.
The Group has zero experience of bad or overdue debts.
The majority of cash and cash equivalents held by the Group are with leading UK banks. The credit risk is managed by carrying out regular reviews of each institution's credit rating and of their published financial position. Given their high credit ratings, management does not expect any counterparty to fail to meet its obligations.
(vi) Liquidity risk
The Group's liquidity risk is minimal because commission payable forms the major part of trade creditors, and payment is made only upon receipt of the related fee income plus the Group's strategy is to maximise its cash position. In addition, the Group's investments in funds that it manages can be liquidated immediately if required.
(vii) Interest rate risk
The Group has no borrowings, and therefore has no exposure to interest rate risk other than that which attaches to its interest earning cash balances and forward currency contracts. The Group's strategy is to maximise the amount of cash which is maintained in interest bearing accounts, and to ensure that those accounts attract a competitive interest rate. At 30th June 2019 the Group held £13,813,089 (2018: £19,704,111) in cash balances, of which £13,548,359 (2018: £19,523,996) was held in bank accounts which attract variable interest rates. The effect of a 100 basis points increase/decrease in interest rates on the Group's net assets would not be material.
(viii) Capital risk management
The Group manages its capital to ensure that all entities within the Group are able to operate as going concerns and exceed any minimum externally imposed capital requirements. The capital of the Group and Company consists of equity attributable to the equity holders of the Parent Company, comprising issued share capital, share premium, retained earnings and other reserves as disclosed in the statement of changes in equity.
The Group's principal operating subsidiary company, City of London Investment Management Company Ltd is subject to the minimum capital requirements of the Financial Conduct Authority (FCA) in the UK. This subsidiary held surplus capital over its requirements throughout the period.
The Group is required to undertake an Internal Capital Adequacy Assessment Process (ICAAP), under which the Board quantifies the level of capital required to meet operational risks. The objective of this is to ensure that the 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.
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City of London Investment Group plc published this content on 16 September 2019 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 16 September 2019 06:06:10 UTC
