Source - RNS
RNS Number : 4922J
City of London Investment Group PLC
12 September 2016
 

12th September 2016

CITY OF LONDON INVESTMENT GROUP PLC (LSE:CLIG)

 ("City of London" or "the Group")

FINAL RESULTS FOR THE YEAR TO 30TH JUNE 2016

SUMMARY

Funds under Management (FuM) at 30th June 2016 were US$4.0 billion (2015: US$4.2 billion), a fall of 5%. In sterling terms, FuM increased by 11% to £3.0 billion (2015: £2.7 billion) as a result of the exchange rate moving from 1.57 to 1.33 over the period. The MSCI Emerging Markets TR Net Index fell 12% over the same period.

Revenues, representing the Group's management charges on FuM, were £24.4 million 2015: £25.4 million). Profit before tax was £8.0 million (2015: £8.9 million).

Basic earnings per share were 23.3p (2015: 26.4p) after a tax charge of 27% (2015: 26%) of pre-tax profits.

A maintained final dividend of 16p per share is recommended, payable on 31st October 2016 to shareholders on the register on 14th October 2016, making a total for the year of 24p (2015: 24p).

For a copy of the full report or further information, please visit the shareholders page of our website http://www.citlon.co.uk or contact:

Barry Olliff (CEO)
City of London Investment Group PLC
Tel: 001 215 313 3774

Martin R Green
Zeus Capital Limited
Financial Adviser & Broker
Tel: +44 (0)20 3829 5000 
 

CHAIRMAN'S STATEMENT

Before addressing this, my fourth Statement as Chairman, I looked back at what I had written a year ago. At that time the long awaited US interest rates recovery was seen as, if not imminent, at least in prospect with consequences more favourable for Developed Markets than for our region of focus, the Emerging Markets (EM). How times have changed - apart from the miniscule 0.25 percent target increase last December, the Fed has yet to embark in any material way on the anticipated rate lift off, falling commodity prices have now at least stabilised (and in some cases recovered) and concern over the Chinese economy has abated considerably.  Prospects for Brazil, following the appointment of Michel Temer as acting President, have improved such that we increased our exposure to Brazil adding to existing successful overweights to India and Russia.

Most importantly, what was not anticipated was the UK vote for BREXIT. For your Company this is something of a double-edged sword consequent upon the accompanying fall in the value of sterling. Little of our income is UK derived whereas a substantial percentage of our costs are sterling based. At the interim stage in February this year following the earlier period of relative US$ strength, I included in my report a matrix table we provide to investors to illustrate the impact of the US$/£ movement on profits. Below is the same matrix but this time with the US$/£ midpoint reduced from 1.45 to 1.3:

FX/Post-tax profit Matrix: Illustration of US$/£ rate effect

FuM US$bn:           3.0           3.5           4.0           4.5           5.0

US$/£                      Post -tax, £m

1.20                         4.8           6.7           8.5           10.4         12.2

1.25                         4.5           6.3           8.1           9.8           11.6

1.30                         4.2           5.9           7.6           9.4           11.1

1.35                         4.0           5.6           7.3           8.9           10.6

1.40                         3.7           5.3           6.9           8.5           10.1

Assumes:

1. Average net fee 86 bp's

2. Annual operating costs £5.0m plus US$8m plus S$1m (£1 = S$1.8)

3. Profit-share 30%

4. Average tax rate 26%

It is clear that a weak pound vs the US$ has a very material effect on our profits.

At the time of writing the final outcome from the BREXIT negotiations is far from clear so the one certainty is that we have uncertainty and that will, hopefully only short term and to a limited extent, have a detrimental effect on both the UK economy and the EU as a whole with some adverse consequences for the EMs given the important trade and financial linkages. I am optimistic, however, that common sense will overcome political spitefulness and that post BREXIT there will be little change from current trade flows with the possibility that at least the UK, albeit small in global terms, will be more open to trade from the EM economies.

Results

Over the year to 30th June 2016 investment performance in our core product, the Emerging Markets closed-end fund strategy, continued to perform well with results in the first or  second quartile versus manager peers for the year. Although markets were difficult and volatile with the MSCI Emerging Markets Index (MXEF) averaging only 816 during the year, clients encouraged by our strong relative performance ensured that we received a net increase in our Funds under Management ("FuM").

At 30th June 2016 we had FuM of US$4.0 billion (£3.0 billion), (2015: US$4.2 billion or £2.7 billion), representing a 5% decrease in US$ terms and an 11% increase in sterling terms as a result of the US$/sterling exchange rate moving from 1.57 to 1.33 over the period. Over the same period, the MSCI Emerging Markets TR Net Index fell by 12% in US$ terms, resulting in a relative change in FuM of +7% versus the benchmark, a product of both positive investment performance and new and existing client inflows.

In commenting on our interim results on 12th February this year when the MXEF was 711  (the low point being 689 on 21st January 2016) I stated that "I am confident that we will continue to make the best of very uncertain markets and that we will again weather the storms just as we have in previous downturns". I can report that we have taken full advantage of the subsequent rebound.

We have again seen an increase in our diversification products, which are now 9.1% of total FuM (2015: 8.5%), despite some redemptions and profit-taking.

Gross revenue for the year was £24.4 million (2015: £25.4 million). Pre-tax profits were £8.0 million (2015: £8.9 million), and profits after an anticipated tax charge of £2.1 million (27% of pre-tax profits) will be £5.9 million (2015: profits of £6.6 million after a tax charge of £2.3 million, representing 26% of pre-tax profit).  Basic and fully diluted earnings per share are 23.3p and 23.1p respectively (2015: 26.4p and 26.0p).

Dividends

As already noted at the interim stage your Board, when appropriate, will take advantage of the flexibility included in your Company's dividend policy to ensure shareholders enjoy a consistent and predictable dividend income. Although the maintained final dividend income of 16p per share making a total for the year of 24p will not be covered, the much improved outlook, noting in particular the beneficial effect on our profits illustrated in our FX Matrix of the post-BREXIT decline in the value of sterling, together with the Group's strong cash position, fully justify this payment.

This would bring the total for the year to 30th June 2016 to 24p (2015: 24p), giving a cover of 0.97 x earnings per share (2015: 1.1 x).

Your Board

This has been a year of unprecedented change at board level; we have lost two directors and gained three. Firstly Carlos Yuste, our Business Development Director, who had been with the Group for 15 years and a Director for 10 years left as of 31st December 2015. Secondly Rian Dartnell, non-executive and chair of the Nominations Committee resigned as of the financial year end due to the pressure of his other work commitments. On a more positive note, Mark Dwyer, CIO Emerging Markets CEF and Tracy Rodrigues, Finance Director joined the CLIG Board and as of 1st July 2016 we have also welcomed Mark Driver to the Board as a non-executive Director.  I have now been a non-executive Director for 10 years and Chairman of the Board for the last four, and had originally intended to step down at this time.  In view of the recent changes on the Board, however, I have agreed to stay on until June 2018 in order to provide continuity over this period. 

Following this year's annual evaluation of the Board and its members, I can confirm that each Director is operating effectively and I therefore recommend that all Directors be re-elected.

Outlook

Over the 2015/16 year the average month end FuM (the relevant dates for fee determination) was US$3.8 billion. To date in the current year the average has been US$4.3 billion. Costs have been contained and so the outcome for the year will be determined by the direction of markets (on which I am not expressing an opinion but note our proactive stance in ensuring that our cost base does not increase in tandem with rising markets), our investment performance and client wins and redemptions. As regards the latter we are grateful to the loyalty shown by clients during a period when Emerging Markets have been volatile and only really appealed to contrarians. I have every reason to believe that our well-honed investment process for our core products will continue to deliver returns superior to our peer group and thereby reward both longstanding and new clients for putting their trust in this firm.

As in previous years all shareholders are most welcome at our AGM in October and your Directors will be available to meet and talk with individual shareholders following the meeting's formal business.

David Cardale
Chairman
8th September 2016

 

START OF STRATEGIC REPORT

CHIEF EXECUTIVE OFFICER'S STATEMENT

At our firms last annual Strategy Meeting (which celebrated our 25th year), the theme was "Constant Improvement".  This, as our shareholders will be aware, has also been a theme as it relates to our annual Accounts. New areas of disclosure this year within the Overview part of my Statement relate to US Taxes, Environmental, Social and Governance (ESG) principles, and BREXIT, which is also referenced in the Chairman's Statement and where you will find a table that we have provided for many years now. We believe this table will be helpful to shareholders when they estimate our P&L in a volatile foreign exchange market.

This year Tom Griffith has written the Business Development Review which, while covering similar topics to last year, also includes a paragraph regarding Operational Support which is a very important part of Business Development.

In my opinion, progress this year at CLIG should not be measured in terms of our investment performance, assets gained and lost or even via the MSCI Emerging Markets Index (Total  Return) (Benchmark). Rather it should be measured via the CLIG share price - this being our preferred measure of "Management Performance".

In a way, this is a very high risk strategy as it assumes that our shareholders are the ultimate arbiter of whether CLIG is "working" well, but having said that, they are the owners so isn't this the best way for us to be measured - i.e., by the owners of the business?

As referenced above, investment performance and our benchmark are good tools of measurement but it's also interesting to review some of the other ingredients that contribute to the valuation that shareholders place upon our business - ultimately demonstrated via the share price.  Client longevity, staff longevity and FuM vs. our benchmark are all contributing factors.

US State Taxation

While this is well outside my area of expertise, what follows should be of interest to our peers who practice in the US.

As a result of opening an office in Seattle (actually for marketing purposes) we found out that Washington State considers that a nexus is created as a result of any client exposure in that State. This tax, whilst not onerous in terms of its quantum, led us to research if we had liabilities in other States. The amount and the principles associated with these gross revenue taxes, the calculation of which goes back four years and is fully accounted for within the figures that were disclosed on 18th July and in these Accounts, are regressive. This type of levy does no good in terms of encouraging firms such as ours and our peers to practice in the US as they increase the cost of doing business. There are a number of other States that currently charge such a tax in addition to Washington and as of today, advice received is that none of these taxes can be offset in terms of any treaty involving DTR.

Diversification and 25 years

When we started our business back in 1991 we just invested in Emerging Markets via Closed-End Funds (CEFs). Since that time our business has diversified both within the EM Asset Class and also outside it.

In the EM space we now manage CEF assets that invest in Special Situations, China A share CEF's and we also have China Specific CEF mandates.

In terms of our diversification away from the Emerging Markets we manage Developed, Frontier, Global Tactical Asset Allocation, and Private Equity closed-end fund assets.

Environmental, Social and Governance (ESG)

If you have been an active watcher of our web site you will not have failed to have noticed its increasing focus on ESG issues over the past two years.

Going back ten years there was a focus on Socially Responsible Investing (SRI). This did not gain any traction, at least not in the US, and it seemed to us to be unduly prescriptive and actually unlikely to change anything.

A few years ago however, we became aware of a new movement which was gathering momentum.

As you will be aware we have significant exposure to Colleges, both Foundations as well as Endowments. Within the ESG movement, it seems to us that from a bottom up perspective the students, those attending the colleges, were asking more and more questions regarding how investments were being made by their relevant Investment Committees. Separate from their interest in the "Process" was the outcome of those investments. In addition, and you could reference this as the top down, philanthropists were increasingly providing "conditional" gifts. These "strings" often related to sensitive areas such as the environment, sustainability, correctness, ethics governance or the oversight of companies.

In addition, and this is a very separate point, we were being asked to tick a box regarding how we were either making our investment decisions or how we were influencing with our client's assets the managers with whom we were investing. As a result, just over two years ago we started to develop the research part of our Investment Process to include questions regarding E, S and also G.

As we have developed this process so we have been able to punch well above our weight because whereas we run cUS$4billion, we were able to talk to managers with FuM of many trillions of dollars. The influence that we have therefore brought to bear with regard to these issues is substantial. At the core of our commitment to this subject is not just the fact that our clients are interested in this area but also that ESG indices have outperformed regular indices.

Investment Performance and the CLIG P&L

Investment performance across the Group has been satisfactory. As mentioned in previous years we go out of our way to find sticky clients. This has the effect of ensuring that earnings are as stable as possible even when markets are volatile.

The most important part of our process in terms of the identification of clients is that they are well educated in terms of what we do, also how we deliver our returns. Money that can come in and out based upon circumstances that are beyond the managers control should not be considered "good" cash flow from a shareholders perspective.

As it is, the major impediment to recent performance within the Emerging Markets CEF business has been a widening of the Size-Weighted Average Discount (SWAD) at which the shares within our portfolios trade. This has been an area of education for our clients since their inception.

BREXIT

More by luck than judgement CLIG was perfectly positioned for BREXIT.
Virtually all CLIM income is USD based - this is good for the bottom line.
Zero FuM effect from BREXIT - the US attitude to the EM's seems to be unchanged
Over 90% of income comes from the EM's - our asset class seems to be in good shape specifically within an EM currency / GBP context.
Approximately 40% of Group costs are in GBP - this assists the P&L.
Approximately 2.5% of CLIM assets are UCIT'S - no vulnerability there.

In the context of a personal view, I would suggest that the outcome from BREXIT will to a great extent be business as usual from a CLIG perspective. I don't see any significant reduction in terms of the type, style or focus of financial regulation. This is primarily because it would seem as if the FCA has been the main sponsor of the legislation that we are presently reviewing from Europe.

Obviously our P&L is at present benefiting substantially as a result of significant UK costs exposure and from the translation of US dollar earnings into sterling.

CLIG Dividend

As you are aware, this has been a tough time for the EM's. As a result the CLIG Board has been very flexible in its application of our dividend policy which is to target cover of 1.2x through a cycle.

With profits receiving the tail wind of a significant reduction in the valuation of GBP it would seem as if, other things being equal, we will be in a very different position when the Board considers next year's dividend.

Employee Share Ownership Plan (ESOP)

In a fund management company, clients attach a significant level of importance to employee share ownership in terms of their commitment to the company for which they work.

It's also in the interest of shareholders for staff to be 'owners' rather than 'renters', to use a housing analogy, thereby ensuring the maximum degree of alignment between employees and shareholders.

While CLIG has had an ESOP in place for many years, the shares held for the ESOP by the Trustees on behalf of staff have not received dividends. This has meant that the annualised rate of total return of approximately 11% received by an initial investor at the point of CLIG's IPO has been reduced very significantly for ESOP holders. Specifically over the past few years the dividends have made up a very significant percentage of the total return.

In an attempt to broaden the base of employee ownership, encourage direct staff participation and make CLIG shares more attractive to staff, we will be bringing forward to shareholders a proposal at the forthcoming AGM. This proposal will include, for a four year period, an increase in the staff bonus pool from 30% to 35%. This increase will only apply while the dividend payable to shareholders is at least maintained at 24p.

The additional 5% from the bonus pool will be offered to staff as a contribution towards the new Employee Incentive Plan, on condition that they put up matching funds.

This will have the effect of incentivising participating staff by matching their investment with an equivalent contribution from the company.

Regarding my Share Stake

For obvious reasons I will not be participating in the aforementioned scheme.

In terms of my CLIG shares I will continue to sell them into strength. My intention therefore (as last year) remains to sell 500,000 at 400p and 500,000 at 450p.

Outlook

Since the year end FuM have risen from US$4.0 billion to US$4.4 billion, at the time of writing.  In addition, the firm continues to have a robust pipeline of potential future business across all asset classes.

CLIM continues to see robust institutional activity across Closed-End Fund asset classes and has every reason to believe that it will at least maintain its position in terms of the provision of Closed-End Fund solutions.

I would again like to thank staff for their hard work over many years in what has been a very difficult market environment. It's very good news that at long last sentiment seems to have changed towards our asset class.

Barry Olliff
Chief Executive Officer
8th September 2016

 

BUSINESS DEVELOPMENT REVIEW

Overview

Relative investment performance in the emerging markets closed-end fund (CEF) strategy remains strong, with first or second quartile results versus manager peers over the period.

There were new inflows of US$374 million in our core emerging market strategies, which were countered by outflows of US$259 million, leading to net inflows of US$115 million as investors were attracted by the significant value that has continued to be reflected in the relatively large size-weighted average discount (SWAD) of c14-15% across client portfolios, as well as the increasing attractiveness of emerging markets overall.

Fundraising in the diversification products resulted in inflows of US$102 million and outflows of US$92 million. Diversification products continued to increase as a percentage of Group Assets Under Management (AUM) at 9.1%, compared with 8.5% last year. These additional assets will assist in efforts to raise the profile of our extension CEF products with institutional consultants and plan sponsors.

Products

Our diversification products attracted additional AUM even as some investors in the Global Tactical Asset Allocation CEF Strategy took some initial funding and profits off the table. The Global Tactical Asset Allocation Strategy encompasses a variety of asset classes via closed-end funds, which is desirable to asset allocators and other investors looking for exposure to a specific market. This strategy adopts a "go-anywhere" approach and is managed as part of the Developed closed-end fund strategy team. While this is a separate team from that managing client assets in the emerging markets, both teams use the same methodology and internal resources. Both taxable and tax-exempt products are available.

Continued strong performance led to additional funding in the Frontier Emerging Markets CEF Strategy, which is an extension of the Emerging Markets core equity product focusing on the smallest (pre-emerging) markets with high growth potential.

Performance

Global composite investment returns for the Emerging Market closed-end fund strategy for the rolling one year ending June 30, 2016 were -9.64% vs. -12.05% for the MSCI Emerging Markets Index in USD and 6.30% vs. 3.46% for the benchmark in GBP.

Global composite investment returns for the Developed Market closed-end fund strategy for the rolling one year ending June 30, 2016 were -11.34% vs. -10.25% for the MSCI ACWI ex US in USD and 4.30% vs. 5.59% for the benchmark in GBP.

Composite investment returns for the Frontier Emerging Market closed-end fund strategy for the rolling one year ending June 30, 2016 were -8.78% vs. -12.05% for the S&P Frontier EM 150 benchmark in USD and 7.31% vs. 3.47% for the benchmark in GBP.

Outlook

Marketing efforts will 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. With the addition of our Seattle office in 2015, we now have dedicated resources on both the east and west coast to drive marketing efforts in the US. Our Developed, Global Tactical Asset Allocation, and Frontier Emerging Market capability will continue to be a focus of our product diversification and business development activities. 

Operational Support

Over the past year we have opportunistically placed additional resources in the Operations group which we view as the engine room for creating additional technology related efficiencies. These resources enhance our ability to leverage both vendor and internally developed applications, manage data, deliver information and communicate globally while maintaining a low risk profile and keeping overhead costs down. Our infrastructure is robust to provide significant economies of scale that allows product diversification, an increase in the number of accounts, a significant increase in trading volume and a new office to be added at minimal cost and without adding additional staff.

 

FINANCIAL REVIEW

Consolidated income statement and statement of comprehensive income

The average Funds under Management (FuM) for the year was US$3.8 billion compared with US$4.1 billion in 2014/2015 (based on the month end values), a fall of approximately 7%, due to negative market movements offset in part by net inflows during the financial year. Group turnover comprises management fees charged as a percentage of FuM and as a result is also down year on year but by less than 4% to £24.4 million (2015: £25.4 million) bolstered by sterling weakening against the US dollar, especially in the latter part of the year.

As expected, commissions payable are down from 9% of gross fees last year to 6% this year. These commissions relate 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. As a guide, the table presented illustrates the rate of the commission run-off relating to the expired contract, based upon FuM and market levels at the year end.

Marketing commission run-off
(based on FuM at 30th June 2016)
Financial year      £m (@ $1.33/£1)
2016-17                   1.4
2017-18                   1.2
2018-19                   0.8
2019-20                   0.1                         

Assumptions:
- No change in client holding
- Constant market level
- Indexed investment performance
- No change in management fees 

The Group's net fee income, after custody charges of £0.7 million (2015: £0.7 million), is £22.2 million (2015: £22.3 million). As a percentage of FuM, net fee income is currently around 86 basis points and has been between 85-86bp for the last two years.

Administrative expenses have increased approximately 6% from £13.6 million to £14.4 million. The largest component of this is staff costs of £10.6 million (2015: £10.4 million), a slight year on year rise attributable to a weaker pound, as the increase in higher wage costs was offset by a lower profit-share payment for the year, charged at 30% (2015: 30%) of pre-bonus operating profit, reflecting the reduction in Group profits. 

Interest receivable and similar gains of £0.2 million includes bank interest on deposits, but primarily relates to the increase in fair value of the funds in which the Group has a controlling interest.

The net of the above results in a pre-tax profit of £8.0 million (2015: £8.9 million). Corporation tax this year amounts to £2.1 million, an effective rate of 27% compared to 26% last period (2015: £2.3 million) as a result of an increase in the sterling equivalent of the Group's US corporation tax provision.

Consolidated statement of financial position and statement of changes in equity 

Cash remains the major part of net assets at £10.2 million representing 72% (2015: £10.2 million, 72%). There were no significant movements in the other principal components of net assets namely: other financial assets of £2.2 million (2015: £2.1 million) which are essentially the Group's seed investments at fair value and the excess of trade and other receivables over trade and other payables £1.9 million (2015: £1.9 million).

Non-current assets comprise property and equipment of £0.4 million (2015: £0.4 million), capitalised software licences of £0.2 million (2015: £0.2 million), and the deferred tax asset of £0.1 million (2015: £0.4 million). The latter 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. 

The major changes in equity attributable to shareholders this year is profit of £5.9 million (2015: £6.6 million) and the dividends paid during the year of £6.0 million (2015: £6.0 million). The dividend comprised the 16p final dividend for 2014/15 plus the 8p interim dividend for the current year. 

Halfway through the year, the Group took the opportunity to use some of its surplus cash to fund the buyback and cancellation of 115,000 Company shares at a weighted average price of £3.26. Directors and employees exercised 99,436 dilutive options and 55,700 ESOP held options, raising £0.5 million. There are no further dilutive options outstanding.

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

As a result of the UK's referendum vote to leave the European Union on 23rd June 2016, sterling fell to a 30 year low against the US dollar. Given the Group's revenue is almost entirely US dollar based whereas c40% of its costs are incurred in sterling, a weak pound has a very positive influence on reported earnings, as illustrated in the FX table presented in the Chairman's statement.

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).

Another aspect of the Group's currency exposure 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 2016 these forward sales totalled US$4.3 million, with a weighted average exchange rate of US$1.45 to £1 (2015: US$5.3 million at a weighted average rate of US$1.57 to £1).

Viability statement

In accordance with the provisions of the UK Corporate Governance Code, the Directors have assessed the viability of the Group, taking into account the Group's current position and prospects, Internal Capital Adequacy Assessment Process ("ICAAP") and principal risks.

The ICAAP is reviewed by the Board semi-annually and incorporates a series of stress tests on the Group's financial position over a three year period. It is prepared to identify and quantify the Group's risks and level of capital which should be held to cover those risks.

Based on the results of this analysis, the Board confirms it has a reasonable expectation that the Company and the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years.

While the Directors have no reason to believe that the Group will not be viable over a longer period, any future assessments are subject to a level of uncertainty that increases with time. The Board have therefore determined that a three year period constitutes an appropriate timeframe for its viability assessment.

 

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 30TH JUNE 2016

 


 


Note

 

Year to

30th June 2016

£

 

Year to

30th June 2015

£

Revenue
Gross fee income

 
4

 

24,412,826

 

25,356,009

Commissions payable

(1,514,707)

(2,274,745)

Custody  fees payable

(735,200)

(737,513)

Net fee income

22,162,919

22,343,751

Administrative expenses
Staff costs

 

 

10,606,490

 

10,418,571

Other administrative expenses


3,631,993

3,027,637

Depreciation and amortisation

168,298

170,852

(14,406,781)

(13,617,060)

Operating profit

5

7,756,138

8,726,691

Interest receivable and similar gains

6

212,595

204,979

Profit before taxation

7,968,733

8,931,670

Income tax expense

7

(2,115,404)

(2,318,004)

Profit for the period

5,853,329

6,613,666

Profit attributable to: 
Non-controlling interests

 

61,975

 

35,821

Equity shareholders of the parent

5,791,354

6,577,845

Basic earnings per share

8

23.3p

26.4p

Diluted earnings per share

8

23.1p

26.0p

 

 

CONSOLIDATED AND COMPANY STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30TH JUNE 2016

 

Group                                               Company


 

Year to

30th June 2016

£

 

Year to

30th June 2015

£

 

Year to

30th June 2016

£

 

Year to

30th June 2015

£

Profit for the period

5,853,329

6,613,666

9,395,022

5,446,205

Items which may be realised through the profit or loss:

Fair value (losses)/gains on available-for-sale investments*

 

(542)

 

2,117

 

(869)

 

2,117

Release of fair value losses/(gains) on disposal of

available-for-sale investments*

 

-

 

40

 

-

 

40

Foreign exchange gains on non-monetary assets

83,058

50,988

-

-

Other comprehensive income/(loss)

82,516

53,145

(869)

2,157

Total comprehensive income for the period

5,935,845

6,666,811

9,394,153

5,448,362

Attributable to:

Equity shareholders of the parent

 

5,873,870

 

6,630,990

 

9,394,153

 

5,448,362

Non-controlling interests

61,975

35,821

-

-

*Net of deferred tax.





 

 

CONSOLIDATED AND COMPANY STATEMENT OF FINANCIAL POSITION

30TH JUNE 2016    

        Group                                       Company

 


 

 

Note

30th June 2016

£

30th June 2015

£

30th June 2016

£

30th June 2015

£

Non-current assets






Property and equipment


431,017

384,083

72,275

88,643

Intangible assets


201,801

196,343

-

-

Other financial assets


2,200,099

2,075,954

1,734,670

1,810,792

Deferred tax asset


86,106

395,354

19,101

34,674



2,919,023

3,051,734

1,826,046

1,934,109

Current assets






Trade and other receivables


5,044,107

4,509,184

5,597,427

1,935,076

Current tax receivable


-

-

306,547

317,095

Cash and cash equivalents


10,150,799

10,226,705

74,755

82,804



15,194,906

14,735,889

5,978,729

2,334,975

Current liabilities






Trade and other payables


(3,122,371)

(2,609,944)

(1,626,909)

(1,601,947)

Current tax payable


(732,795)

(814,638)

-

-

Creditors, amounts falling due within one year


(3,855,166)

(3,424,582)

(1,626,909)

(1,601,947)

Net current assets


11,339,740

11,311,307

4,351,820

733,028

Total assets less current liabilities


14,258,763

14,363,041

6,177,866

2,667,137

Non-current liabilities






Deferred tax liability


(137,514)

(115,525)

(2,019)

(2,154)

Net assets


14,121,249

14,247,516

6,175,847

2,664,983

 

Capital and reserves






Share capital

9

268,967

269,123

268,967

269,123

Share premium account


2,256,104

2,117,888

2,256,104

2,117,888

Investment in own shares


(5,298,916)

(5,692,430)

(5,298,916)

(5,692,430)

Fair value reserve


8,077

8,619

7,750

8,619

Share option reserve


563,350

807,106

563,350

620,541

Foreign exchange reserve


75,407

(7,651)

-

-

Capital redemption reserve


22,747

21,597

22,747

21,597

Retained earnings


15,593,570

16,127,877

8,355,845

5,319,645

Shareholders interest


13,489,306

13,652,129

6,175,847

2,664,983

Non-controlling interest


631,943

595,387

-

-

Total equity


14,121,249

14,247,516

6,175,847

2,664,983

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

30TH JUNE 2016

 

 

 

 

 

Share capital

£

 

Share premium account

£

 

Investment in own shares

£

 

Fair

value reserve

£

 

Foreign exchange reserve

£

 

Share option reserve

£

Capital redemp-tion reserve

£

 

 

Retained earnings

£

Total attributable to share-

holders

£

Non- control-ling interest

£

 

 

 

Total

£

At 1st July 2014

269,727

2,060,809

(4,884,025)

6,462

(58,639)

732,651

20,582

15,759,107

13,906,674

518,494

14,425,168

Profit for the period

-

-

-

-

-

-

-

6,577,845

6,577,845

35,821

6,613,666

Comprehensive income

-

-

-

2,157

50,988

-

-

-

53,145

-

53,145

Total comprehensive income

-

-

-

2,157

50,988

-

-

6,577,845

6,630,990

35,821

6,666,811

Transactions with owners

Forex movement on

NCI investment

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

41,072

 

 

41,072

Share option exercise

411

57,079

188,536

-

-

(36,358)

-

36,358

246,026

-

246,026

Share cancellation

(1,015)

-

-

-

-

-

1,015

(325,054)

(325,054)

-

(325,054)

Purchase of own shares

-

-

(996,941)

-

-

-

-

-

(996,941)

-

(996,941)

Share-based payment

-

-

-

-

-

10,037

-

-

10,037

-

10,037

Deferred tax

-

-

-

-

-

100,776

-

8,737

109,513

-

109,513

Current tax on share options

-

-

-

-

-

-

-

30,711

30,711

-

30,711

Dividends paid

-

-

-

-

-

-

-

(5,959,827)

(5,959,827)

-

(5,959,827)

Total transactions with owners

(604)

57,079

(808,405)

-

-

74,455

1,015

(6,209,075)

(6,885,535)

41,072

(6,844,463)

At 30th June 2015

269,123

2,117,888

(5,692,430)

8,619

(7,651)

807,106

21,597

16,127,877

13,652,129

595,387

14,247,516

 

Profit for the period

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

5,791,354

 

5,791,354

 

61,975

 

5,853,329

Comprehensive income

-

-

-

(542)

83,058

-

-

-

82,516

-

82,516

Total comprehensive income

-

-

-

(542)

83,058

-

-

5,791,354

5,873,870

61,975

5,935,845

Transactions with owners

Forex movement on

NCI investment

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(25,419)

 

 

(25,419)

Share option exercise

994

138,216

393,514

-

-

(74,059)

-

74,059

532,724

-

532,724

Share cancellation

(1,150)

-

-

-

-

-

1,150

(375,502)

(375,502)

-

(375,502)

Share-based payment

-

-

-

-

-

16,868

-

-

16,868

-

16,868

Deferred tax

-

-

-

-

-

(186,565)

-

(129,958)

(316,523)

-

(316,523)

Current tax on share options

-

-

-

-

-

-

-

87,461

87,461

-

87,461

Dividends paid

-

-

-

-

-

-

-

(5,981,721)

(5,981,721)

-

(5,981,721)

Total transactions with owners

(156)

138,216

393,514

-

-

(243,756)

1,150

(6,325,661)

(6,036,693)

(25,419)

(6,062,112)

At 30th June 2016

268,967

2,256,104

(5,298,916)

8,077

75,407

563,350

22,747

15,593,570

13,489,306

631,943

14,121,249













 

 

 

COMPANY STATEMENT OF CHANGES IN EQUITY

30TH JUNE 2016

 


 

 

 

Share capital

£

 

Share premium account

£

 

 

Investment in own shares

£

 

 

Fair value reserve

£

 

Share option reserve

£

 

Capital redemption reserve

£

 

 

Retained earnings

£

Total attributable to shareholders

£

At 1st July 2014

269,727

2,060,809

(4,884,025)

6,462

646,862

20,582

6,115,264

4,235,681

Profit for the period

-

-

-

-

-

-

5,446,205

5,446,205

Comprehensive income

-

-

-

2,157

-

-

-

2,157

Total comprehensive income

-

-

-

2,157

-

-

5,446,205

5,448,362

Transactions with owners









Share option exercise

411

57,079

188,536

-

(36,358)

-

16,943

226,611

Share cancellation

(1,015)

-

-

-

-

1,015

(325,054)

(325,054)

Purchase of own shares

-

-

(996,941)

-

-

-

-

(996,941)

Share-based payment

-

-

-

-

10,037

-

-

10,037

Deferred tax

-

-

-

-

-

-

17,280

17,280

Current tax on share options

-

-

-

-

-

8,834

8,834

Dividends paid

-

-

-

-

-

-

(5,959,827)

(5,959,827)

Total transactions with owners

(604)

57,079

(808,405)

-

(26,321)

1,015

(6,241,824)

(7,019,060)

At 30th June 2015

269,123

2,117,888

(5,692,430)

8,619

620,541

21,597

5,319,645

2,664,983

 

Profit for the period

 

-

 

-

 

-

 

-

 

-

 

-

 

9,395,022

 

9,395,022

Comprehensive income

-

-

-

(869)

-

-

-

(869)

Total comprehensive income

-

-

-

(869)

-

-

9,395,022

9,394,153

Transactions with owners









Share option exercise

994

138,216

393,514

-

(74,059)

-

18,133

476,798

Share cancellation

(1,150)

-

-

-

-

1,150

(375,502)

(375,502)

Share-based payment

-

-

-

-

16,868

-

-

16,868

Deferred tax

-

-

-

-

-

-

(22,848)

(22,848)

Current tax on share options

-

-

-

-

-

-

3,116

3,116

Dividends paid

-

-

-

-

-

-

(5,981,721)

(5,981,721)

Total transactions with owners

(156)

138,216

393,514

-

(57,191)

1,150

(6,358,822)

(5,883,289)

At 30th June 2016

268,967

2,256,104

(5,298,916)

7,750

563,350

22,747

8,355,845

6,175,847










 

 

 

CONSOLIDATED AND COMPANY CASH FLOW STATEMENT

FOR THE YEAR ENDED 30TH JUNE 2016

      Group                                       Company

 


 

 

Note

 

30th June 2016

£

 

30th June 2015

£

 

30th June 2016

£

 

30th June 2015

£

Cash flow from operating activities






Operating profit


7,756,138

8,726,691

154,546

183,428

Adjustments for:






(Loss)/profit on disposal of assets


(515)

-

185


Depreciation charges


118,742

125,392

42,943

56,919

Amortisation of intangible assets


49,556

45,460

-

-

Share-based payment charge


16,868

10,037

36,374

8,090

Translation adjustments


(243,072)

(154,153)

(8,903)

(70,383)

(Profit)/loss on disposal of fixed assets


-

-

-

-

Cash generated from operations before changes






in working capital


7,697,717

8,753,427

225,145

178,054

(Increase)/decrease in trade and other receivables


(534,923)

(873,707)

(3,662,351)

353,408

Increase/(decrease) in trade and other payables


512,427

1,315,488

24,962

1,163,677

Cash generated from/(used in) operations


7,675,221

9,195,208

(3,412,244)

1,695,139

Interest received


40,195

57,482

74

404

Interest paid


-

-

-

-

Taxation (paid)/received


(2,094,937)

(2,219,304)

(22,012)

52,439

Net cash generated from/(used in) operating activities


5,620,479

7,033,386

(3,434,182)

1,747,982

 

Cash flow from investing activities






Dividends received from subsidiaries


-

-

9,269,000

5,292,000

Purchase of property and equipment


(139,164)

(108,136)

(26,760)

(19,517)

Proceeds from sale of property and equipment


2,047

-

-

-

Purchase of non-current financial assets


-

-

-

-

Proceeds from sale of non-current financial assets


23,098

5,960

310

3,168

Purchase of current financial assets


-

(328,962)

-

(328,962)

Proceeds from sale of current financial assets


-

329,382

-

329,382

Net cash (used in)/generated from investing activities


(114,019)

(101,756)

9,242,550

5,276,071

 

Cash flow from financing activities






Proceeds from issue of ordinary shares


139,210

57,490

139,210

57,490

Ordinary dividends paid

10

(5,981,721)

(5,959,827)

(5,981,721)

(5,959,827)

Purchase and cancellation of own shares


(375,502)

(325,054)

(375,502)

(325,054)

Purchase of own shares by employee share option trust


-

(996,941)

-

(996,941)

Proceeds from sale of own shares by employee






share option trust


393,514

188,536

393,514

188,536

Capital from non-controlling interest


-

-

-

-

Net cash used in financing activities


(5,824,499)

(7,035,796)

(5,824,499)

(7,035,796)

 

Net (decrease)/increase in cash and cash equivalents


 

(318,039)

 

(104,166)

 

(16,131)

 

(11,743)

Cash and cash equivalents at start of period


10,226,705

10,242,906

82,804

90,045

Effect of exchange rate changes


242,133

87,965

8,082

4,502

Cash and cash equivalents at end of period


10,150,799

10,226,705

74,755

82,804

 

 

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30TH JUNE 2016

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 2016 and 30th June 2015 does not constitute statutory accounts and has been extracted from the full accounts for the years ended 30th June 2016 and 30th June 2015. 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 2015 have been filed with the Registrar of Companies. The accounts for the year ended 30th June 2016 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.

The Group financial statements for the year ended 30th June 2016 comprise the Company and its subsidiaries ("the Group"). The significant accounting policies applied in the preparation of the Group financial statements are summarised below. These policies have been consistently applied to all the financial periods presented, unless otherwise stated.

1    BASIS OF PREPARATION

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union ("EU") and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Group financial statements have been prepared under the historical cost convention, except for certain financial assets held by the Group that are reported at fair value. The Group and Company financial statements have been prepared on a going concern basis.

New IFRS Standards and Interpretations

As at 30th June 2016, the following Standards and Interpretations, which are relevant to the Group, were in issue but subject to EU endorsement:

IFRS 9 replaces the classification and measurement models for financial instruments in IAS 39 with three classification categories: amortised cost, fair value through profit or loss and fair value through other comprehensive income. The Group's business model and the contractual cash flows arising from its investments in financial instruments determine the classification. Equity instruments will be recorded at fair value, with gains or losses reported either in the income statement or through equity. However, where fair value gains and losses are recorded through equity there will no longer be a requirement to transfer gains or losses to the Income statement on impairment or disposal.

IFRS 9 also introduces an expected loss model for the assessment of impairment. The current incurred loss model (under IAS 39) requires the Group to recognise impairment losses when there is objective evidence that an asset is impaired; under the expected loss model, impairment losses are recorded if there is an expectation of credit losses, even in the absence of a default event. This standard is currently expected to become effective in 2018.

IFRS 15 deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised when a customer obtains control of goods or service and thus has the ability to direct the use and obtain the benefits from the goods or service. The Standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations. The Standard is expected to become effective for annual periods beginning on or after 1st January 2018 and earlier application is permitted subject to EU endorsement.

IFRS 16 requires a lessee to recognise lease assets and liabilities, currently accounted for as operating leases, on the statement of financial position and recognise amortisation of the lease assets and interest on the lease liabilities over the term of the lease. This Standard is currently expected to become effective in 2019.

The Group is assessing the impact of the above Standards on its future financial statements. In relation to IFRS 16, the majority of the Group's leases will expire before the Standard is effective and therefore it is not possible at this time to assess the extent of the Standard's impact in the year of adoption.

Accounting estimates and assumptions

The preparation of these financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Whilst estimates are based on management's best knowledge and judgement using information and financial data available to them, the actual outcome may differ from those estimates.

The most significant area of the financial statements that are subject to the use of estimates and assumptions are noted below:

Share-based payments

In order to calculate the charge for share-based compensation as required by IFRS 2, the Group makes estimates principally relating to the assumptions used in its option pricing model.

2    BASIS OF CONSOLIDATION

These financial statements consolidate the financial statements of the Company and all of its subsidiary undertakings.  The Group's subsidiaries are those entities which it directly or indirectly controls. Control over an entity is evidenced by the Group's ability to exercise its power in order to affect any variable returns that the Group is exposed to through its involvement with the entity.

When assessing whether to consolidate an entity, the Group evaluates a range of control factors, 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 2016 are detailed below.

 



 

 

Controlling

 

Country of inc./ Principal place

Subsidiary undertakings

Activity

interest

of business

City of London Investment Management Company Limited

Management of funds

100%

UK

City of London US Investments Limited

Holding company for US companies

100%

UK

World Markets Umbrella Global Equity Fund

Open-end offshore sub-fund

100%

Rep. Ireland

International Equity CEF Fund

Delaware Statutory Trust fund

52%

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

 

The consolidated financial statements are prepared on the historical cost basis except for the revaluation of certain financial instruments as outlined in note 3 (iii).

3    SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies adopted are set out below and have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. In addition, where presentational changes are made in the current period, the prior year figures are also updated to present a true comparative.

(i) Property and equipment

For all property and equipment depreciation is calculated to write off their cost to their estimated residual values by equal annual instalments over the period of their estimated useful lives, which are considered to be:

Short leasehold property improvements   -   over the remaining life of the lease
Furniture and equipment                        -   four years
Computer and telephone equipment       -   four years

(ii) Intangible assets

Intangible assets acquired separately are capitalised at cost and amortised on a straight line basis. Amortisation charges are spread over the useful life of the asset as follows:

Long term software licences                       -   ten years 

This represents a perpetual licence for the Group's fund accounting system. The Directors consider ten years as a reasonable estimate of useful life given the improved control and flexibility to manage and develop the software in-house.

An additional software licence purchased during the year was assessed and will be amortised over five years.

The assets are reviewed for impairment each year.

(iii) Financial instruments

Under IAS 39, "Financial Instruments: Recognition and Measurement", financial assets must be classified as either: 

• Loans and receivables
• Held-to-maturity investments
• Available-for-sale financial assets
• At fair value through profit or loss 

Financial liabilities must be classified at fair value through profit or loss or at amortised cost.

Except where investments in funds are identified as subsidiaries, the Group's investments in the funds that it manages are designated as available-for-sale financial assets. Such investments are initially recognised at fair value, being the consideration given together with any acquisition costs associated with the investment. They are subsequently carried at fair value, with any gains or losses arising from changes in fair value included as part of other comprehensive income. Fair value is determined using the price based on the net asset value of the fund. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred all risks and rewards of ownership. When derecognition occurs a realised profit or loss is recognised in the income statement, calculated as the difference between the net sales proceeds and the original cost of the financial asset. Any fair value gains or losses previously recognised as part of other comprehensive income are recycled into the income statement as part of this calculation of the profit or loss arising on derecognition.

The Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of an investment classified as available-for-sale, a significant or prolonged decline in the fair value of the investment below its cost is considered as an indicator that the investment is impaired. If any such evidence exists for available-for-sale investments, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement - is removed from other comprehensive income and recognised in the income statement. 

The Group's investments in securities and derivatives are classified as financial assets or liabilities at fair value through profit or loss. Such investments are initially recognised at fair value, and are subsequently remeasured at fair value, with any movement recognised in the income statement. The fair value of the derivatives held by the Group is determined as follows:

Shares - priced using the quoted market mid price* 
Options - priced using the quoted market bid price
Forward currency trades - priced using the forward exchange bid rates from Bloomberg 

*The funds managed by the Group are valued at the mid price in accordance with US GAAP. Therefore, where the Group has identified investments in those funds as subsidiaries, the fair value consolidated is the net asset values as provided by the administrator of the funds. The underlying investments in these funds are predominantly in blue chip companies and as such are very tradable with a small bid-ask spread.

The Group's investments have been classified here for recognition and measurement purposes under IAS39 but are not necessarily reported in the statement of financial position under those headings. 

(iv) Trade receivables

Trade receivables are measured on initial recognition at fair value, and are subsequently carried at the lower of original fair value and their recoverable amount. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is objective evidence that the asset is impaired.

(v) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits with an original maturity of three months or less from inception, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. 

(vi) Trade payables

Trade payables are measured at initial recognition at fair value and subsequently measured at amortised cost.

 (vii) Current and deferred taxation

The Group provides for current tax according to the tax regulations in each jurisdiction in which it operates, using tax rates that have been enacted or substantively enacted by the reporting date.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. However, deferred tax is not accounted for if it arises from goodwill or the initial recognition (other than in a business combination) of other assets or liabilities in a transaction that affects neither the accounting nor the taxable profit or loss. 

Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised.  The tax rates used are those that have been enacted, or substantively enacted, by the end of the reporting period. Deferred tax is charged or credited to the income statement, except when it relates to items charged or credited directly as part of other comprehensive income, in which case the deferred tax is also dealt with as part of other comprehensive income. For share-based payments, where the estimated future tax deduction exceeds the amount of the related cumulative remuneration expense, the excess deferred tax is recognised directly in equity. 

(viii) Share-based payments

The Company operates an Employee Share Option Plan. The fair value of the employee services received in exchange for share options is recognised as an expense. The fair value has been calculated using the Binomial pricing model, and has then been expensed on a straight line basis over the vesting period, based on the Company's estimate of the number of shares that will actually vest. At the end of the three year period when the actual number of shares vesting is known, the share-based payment charge is re-calculated and any difference is taken to the profit or loss.

(ix) Revenue

Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and such revenue can be reliably measured.  Revenue is recognised as services are provided and comprises investment management fees based on a percentage of Funds under Management, in accordance with the underlying agreements. 

(x) Commissions payable

A significant portion of the Group's revenue is subject to commissions payable under third party marketing agreements. Commissions payable are recognised in the same period as the revenue to which they relate.

(xi) Foreign currency translation

Foreign currency transactions are translated using the exchange rates prevailing at the transaction date. Monetary assets held in a currency other than the functional currency are translated at the end of each financial period at the period end closing rates.  

The functional currency of the Group's main trading subsidiaries, City of London Investment Management Company Limited and City of London US Services Limited, is US dollars. The functional currency of City of London Investment Group PLC (the "Company") is sterling. The Group uses sterling as the presentation currency. Under IAS 21 this means that exchange differences caused from translating the functional currency to presentational currency for the main trading subsidiaries would be recognised in equity. However, the Group operates a policy whereby the foreign exchange positions of the subsidiaries in relation to the income statement and monetary assets are sold to the Company. As such any exchange differences arising in the Company are "real" in that the functional currency matches the presentational currency. This means that all such exchange differences are included in the income statement and no split is required between other comprehensive income and the income statement. The subsidiaries translate the non-monetary assets at the period end rate and any movement is reflected in other comprehensive income.

(xii) Leases

The cost of operating leases is charged to the income statement in equal periodic instalments over the period of the leases. 

(xiii) Pensions

The Group operates defined contribution pension schemes covering the majority of its employees. The costs of the pension schemes are charged to the income statement as they are incurred. Any amounts unpaid at the end of the period are reflected in other creditors.

4    SEGMENTAL ANALYSIS 

The Directors consider that the Group has only one reportable segment, namely asset management, and hence only analysis by geographical location is given.


USA

£

Canada

£

UK

£

Europe (ex UK)

£

Other

£

Total

£

Year to 30th June 2016







Gross fee income

22,609,241

798,158

344,259

661,168

-

24,412,826

Non-current assets:







Property and equipment

358,742

-

63,715

-

8,560

431,017

Intangible assets

201,801

-

-

-

-

201,801

Year to 30th June 2015







Gross fee income

23,607,743

789,710

185,731

772,825

-

25,356,009

Non-current assets:







Property and equipment

295,440

-

84,635

-

4,008

384,083

Intangible assets

196,343

-

-

-

-

196,343

 

The Group has classified its fee income based on the domicile of its clients and non-current assets based on where the assets are held. Any individual client generating revenue of 10% or more would be disclosed separately, as would assets in a foreign country if they were material. 

 

5

OPERATING PROFIT

 

 

 

Year to

 

 

 

Year to


 

The operating profit is arrived at after charging:

30th June 2016

£

30th June 2015

£


Depreciation of owned assets

118,742

125,392


Amortisation of intangible assets

49,556

45,460


Auditors' remuneration:




- Statutory audit

75,160

80,347


- Taxation services

-

10,562


- Audit related assurance services

7,968

7,572


- Other services

-

1,937


Operating lease rentals:




- Land and buildings

429,995

377,837


- Other

81

1,527

 

6    INTEREST RECEIVABLE AND  SIMILAR GAINS




Year to

30th June 2016

£

Year to

30th June 2015

£

Interest on bank deposit

40,195

57,482

Gain on sale of investments

(197)

7,205

Unrealised gain on investments

172,597

140,292


212,595

204,979

  


7   TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES

 

 

 

Year to

 

 

 

Year to


 

(a) Analysis of tax charge on ordinary activities:

30th June 2016

£

30th June 2015

£


Tax at 20% (2015: 21%) based on the profit for the period

1,586,907

1,862,091


Double taxation relief

(911,452)

(1,163,081)


Deferred tax

14,849

13,795


Change in tax rate to 20%

-

(8,214)


Adjustments in respect of prior years

134

(1,689)


Domestic tax total

690,438

702,902


Foreign tax for the current period

1,509,277

1,634,366


Adjustments in respect of prior years

(84,311)

(19,264)


Foreign tax total

1,424,966

1,615,102


Total tax charge in income statement

2,115,404

2,318,004

 

(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 - 20% (prior year - 21%). The differences are explained below:

 


 

Year to

30th June 2016

£

 

Year to

30th June 2015

£

Profit on ordinary activities before tax

7,968,733

8,931,670

Tax at 20% (2015: 21%) thereon

(1,593,747)

(1,875,651)

Effects of:



Unrelieved overseas tax

(597,825)

(471,285)

Expenses not deductible for tax purposes

(8,605)

1,415

Income ineligible for tax

34,519

29,461

Capital allowances  less than depreciation

(21,705)

(21,290)

Prior period adjustments

84,177

20,953

Deferred tax on share based-payments and investments

(14,849)

(13,795)

Change in tax rate to 20%

-

8,214

Other

2,631

3,974

Total tax charge in income statement

(2,115,404)

(2,318,004)

 

 

8 EARNINGS PER SHARE

 The calculation of earnings per share is based on the profit attributable to shareholders of the parent for the period of £5,791,354 (2015: £6,577,845) divided by the weighted average number of ordinary shares in issue for the period ended 30th June 2016 of 24,903,965 (2015: 24,907,864).

The Employee Benefit Trust held 1,852,213 ordinary shares in the Company as at 30th June 2016. The Trustees of the Trust have waived all rights to dividends associated with these shares. In accordance with IAS 33 the ordinary shares held by the Employee Benefit Trust have been excluded from the calculation of the weighted average of ordinary shares in issue. 

The calculation of diluted earnings per share is based on the profit attributable to shareholders of the parent for the period of £5,791,354 (2015: £6,577,845) divided by the diluted weighted average of ordinary shares for the period ended 30th June 2016 of 25,045,522 (2015: 25,272,704).

Reconciliation of the figures used in calculating basic and diluted earnings per share:

 

 

30th June 2016

 

 

30th June 2015


Number of shares

Number of shares

Weighted average number of shares - basic earnings per share

24,903,965

24,907,864

Effect of dilutive potential shares - share options

141,557

364,840

Weighted average number of shares - diluted earnings per share

25,045,522

25,272,704

 

 

9  SHARE CAPITAL

 

 

 

30th June 2015

 

 

 

30th June 2014

Group and Company

£

£

Allotted, called up and fully paid



At start of period 26,912,271 (2015: 26,972,707) Ordinary shares of 1p each

269,123

269,727

Dilutive share options exercised; 99,436 (2015: 41,064)

994

411

Shares repurchased and cancelled; 115,000 (2015: 101,500)

(1,150)

(1,015)

At end of period 26,896,707 (2015: 26,912,271) Ordinary shares of 1p each

268,967

269,123

 

Fully paid ordinary shares carry one vote per share and carry a right to dividends.



 

 

10  DIVIDEND

 

 

 

30th June 2015

 

 

 

30th June 2014


£

£

Dividends paid:



Interim dividend of 8p per share (2015: 8p)

1,996,704

1,985,039

Final dividend in respect of year ended:



30th June 2015 of 16p per share (2014: 16p)

3,985,017

3,974,788


5,981,721

5,959,827

 

A final dividend of 16p per share has been proposed, payable on 31st October 2016, subject to shareholder approval, to shareholders who are on the register of members on 14th October 2016.

 

11  FINANCIAL INSTRUMENTS

The Group's financial assets include cash and cash equivalents, investments and other receivables. Its financial liabilities include accruals and other payables. The fair value of the Group's financial assets and liabilities is materially the same as the book value.

(i) Financial instruments by category

The tables below show the Group and Company's financial assets and liabilities as classified under IAS39:

 

Group

 

 

Loans and

 

Assets at fair value through

 

 

Available-


30th June 2016

receivables

profit or loss

for-sale

Total

Assets as per statement of financial position

£

£

£

£

Other financial assets

-

2,172,645

27,454

2,200,099

Trade and other receivables

5,044,107

-

5,044,107

Cash and cash equivalents

10,150,799

-

-

10,150,799

Total

15,194,906

2,172,645

27,454

17,395,005



 

 

Liabilities at

 

 

Financial




fair value

liabilities at




through

amortised




profit or loss

cost

Total

Liabilities as per statement of financial position


£

£

£

Trade and other payables


276,743

2,845,628

3,122,371

Total


276,743

2,845,628

3,122,371



 

 

Assets at fair



 

30th June 2015

Loans and

receivables

value through

profit or loss

Available-

for-sale

 

Total

Assets as per statement of financial position

£

£

£

£

Other financial assets

-

2,049,170

26,784

2,075,954

Trade and other receivables

4,505,655

3,529

4,509,184

Cash and cash equivalents

10,226,705

-

-

10,226,705

Total

14,732,360

2,052,699

26,784

16,811,843



 

 

Liabilities at

 

 

Financial




fair value

liabilities at




through

amortised




profit or loss

cost

Total

Liabilities as per statement of financial position


£

£

£

Trade and other payables


-

2,609,944

2,609,944

Total


-

2,609,944

2,609,944

 

Company

 

 

Investment

 

 

Loans and

 

Assets at fair value through

 

 

Available-


30th June 2016

in subsidiaries

receivables

profit or loss

for-sale

Total

Assets as per statement of financial position

£

£

£

£

£

Other financial assets

1,707,216

-

-

27,454

1,734,670

Trade and other receivables

-

5,597,427

-

-

5,597,427

Cash and cash equivalents

-

74,755

-

-

74,755

Total

1,707,216

5,672,182

-

27,454

7,406,852



 

 

Liabilities at

 

 

Financial




fair value

liabilities at




through

amortised




profit or loss

cost

Total

Liabilities as per statement of financial position


£

£

£

Trade and other payables


-

1,626,909

1,626,909

Total


-

1,626,909

1,626,909



 

 

                         Assets at fair



 

30th June 2015

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

1,784,645

-                                      -

26,147

1,810,792

Trade and other receivables

-

1,935,076                       -

-

1,935,076

Cash and cash equivalents

-

82,804                            -

-

82,804

Total

1,784,645

2,017,880                       -

26,147

3,828,672



 

 

Liabilities at

 

 

Financial




fair value

liabilities at




through

amortised




profit or loss

cost

Total

Liabilities as per statement of financial position


£

£

£

Trade and other payables


-

1,601,947

1,601,947

Total


-

1,601,947

1,601,947

 

(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 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 2016

£

£

£

£

Available-for-sale financial assets





Investment in own funds

-

27,454

-

27,454

Total

-

27,454

-

27,454

Financial assets at fair value through profit or loss





Investment in other financial assets

2,160,174

12,457

14

2,172,645

Forward currency trades

-

-

-

-

Total

2,160,174

12,457

14

2,172,645

Financial liabilities at fair value through profit or loss

Forward currency trades

 

-

 

276,743

 

-

 

276,743

Total

-

276,743

-

276,743

30th June 2015

 Level 1

£

 Level 2

£

 Level 3

£

 Total

£

Available-for-sale financial assets





Investment in own funds

-

26,784

-

26,784

Total

-

26,784

-

26,784

Financial assets at fair value through profit or loss





Investment in other financial assets

2,020,615

28,542

13

2,049,170

Forward currency trades

-

3,529

-

3,529

Total

2,020,615

32,071

13

2,052,699

 

Company





 

30th June 2016

Level 1

£

Level 2

£

Level 3

£

Total

£

Available-for-sale financial assets





Investment in own funds

-

27,454

-

27,454

Total

-

27,454

-

27,454

 

 

 

30th June 2015

 

 

Level 1

£

 

 

Level 2

£

 

 

Level 3

£

 

 

Total

£

Available-for-sale financial assets





Investment in own funds

-

26,147

-

26,147

Total

-

26,147

-

26,147

 

Level 3

Assets as of 30th June 2016 consist of one security valued at £14 (2015: £13). The Level 3 asset is an investment fund where significant unobservable inputs are being used to assign value as the investment fund is in liquidation. Previously quoted prices in active markets were being used in the valuation of the security. When the shares were placed into liquidation and market activity ceased, significant unobservable inputs were used to assign a value to the security as of year end.

The Fund establishes valuation processes and procedures to ensure that the valuation techniques for investments that are categorized 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.

All fair value gains and losses included in other comprehensive income relate to the investment in own funds. 

Where there is an impairment in the investment in own funds, the loss is reported in the income statement. No impairment was recognised during the period or the preceding year.

The fair value gain on the forward currency trades is offset in the income statement by the foreign exchange losses on other currency assets and liabilities held during the period and at the period end. The net loss reported for the period is £179,495 (2015: net loss £94,670). 

(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 and Canadian 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 30 June 2016, the Group had net asset balances of US$5,399,570 (2015: US$4,819,332), offset by forward sales totalling US$4,250,000 (2015: US$5,250,000). Other significant net asset balances were C$387,803 (2015: C$325,558), AED248,149 (2015: AED290,456), and SGD196,587 (2015: net liabilities of SGD651,590).

Had the US dollar strengthened or weakened against sterling as at 30th June 2016 by 10%, with all other variables held constant, the Group's net assets would have increased or decreased (respectively) by approximately 2.5%, because the US dollar position is hedged by the forward sales. 

Further details on the effects on the Group's post-tax profits due to movements in the US dollar/sterling exchange rate have been demonstrated in the Chairman's statement.

(iv) Market risk 

Changes in market prices, such as foreign exchange rates and equity prices will affect the Group's income and the value of

its investments.

Where the Group holds investments in its own funds, the market price risk is managed through diversification of the portfolio. A 10% increase or decrease in the price level of the funds' relevant benchmarks, with all other variables held constant, would result in an increase or decrease of approximately £0.2 million in the value of the investments and profit before tax. 

The Group is also exposed to market risk indirectly via its assets under management, from which its fee income is derived. To hedge against any potential loss in fee income due to a fall in the markets, the Group will look to invest in out-of-the-money put options on the emerging markets index. The purchase and sale of these options are subject to limits established by the Board and are monitored on a regular basis. The investment management and settlement functions are totally segregated.

The income from hedging recognised in the Group income statement for the period is £Nil (2015: 7,604). 

Further details on the effects on the Group's post-tax profits due to movements in market prices have been demonstrated in the post-tax profits table in the Chairman's statement.

(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 2016 the Group held £10,150,799 (2015: £10,226,705) in cash balances, of which £9,899,916 (2015: £9,977,221) was held in bank accounts which attract variable interest rates. The effect of a 100 basis points increase/decrease in interest rates on the Group's net assets would not be material.

(viii) Capital risk management 

The Group manages its capital to ensure that all entities within the Group are able to operate as going concerns and exceed any minimum externally imposed capital requirements. The capital of the Group and Company consists of equity attributable to the equity holders of the Parent Company, comprising issued share capital, share premium, retained earnings and other reserves as disclosed in the statement of changes in equity.

The Group's principal operating subsidiary company, City of London Investment Management Company Ltd is subject to the minimum capital requirements of the Financial Conduct Authority ("FCA") in the UK. This subsidiary held surplus capital over its requirements throughout the period. 

The Group is required to undertake an Internal Capital Adequacy Assessment Process ("ICAAP"), under which the Board quantifies the level of capital required to meet operational risks. The objective of this is to ensure that the firm has adequate capital to enable it to manage risks which are not adequately covered under the Pillar 1 requirements. This process includes stress testing for the effects of major risks, such as a significant market downturn, and includes an assessment of the Group's ability to mitigate the risks.


This information is provided by RNS
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