City of London Investment Group plc (LON:CLIG) has announced its final results for the year to 30th June 2020.
SUMMARY
- Funds under management (FuM) at 30th June 2020 were US$5.5 billion (2019: US$5.4 billion), an increase of 2%. In sterling terms, FuM increased by 5% to £4.4 billion (2019: £4.3 billion).
- Revenues, representing the Group’s management charges on FuM, were £33.3 million (2019: £31.9 million). Underlying profit before tax and exceptional items was £10.7 million (2019: £11.4 million). Profit before tax was £9.4 million (2019: £11.4 million). Underlying profit before tax, exceptional items and losses/(gains) on seed investments in REIT funds was £11.5 million (2019: £10.6 million).
- Underlying basic earnings per share before exceptional items were 35.3p (2019: 34.9p). Basic earnings per share were 30.3p (2019: 34.9p) after an effective tax charge of 22% (2019: 21%) of pre-tax profits.
- A final dividend of 20p per share is recommended, payable on 30th October 2020 to shareholders on the register on 9th October 2020, making a total for the year of 30p (2019: 40.5p including special dividend of 13.5p).
BOARD CHANGE
Susannah Nicklin has advised the Board of her intention not to seek re-election as a Director at the forthcoming AGM on October 19th, due to external commitments. As a consequence, the CLIG Nomination Committee has initiated a search process for a replacement with a view to making an appointment in the near future. This will also involve a replacement appointment for the role of Senior Independent Director. Barry Aling will assume the Chair of the Nomination Committee on an interim basis.
Susannah has been a valued and active member of the Board over the last three years and we would like to extend our sincere thanks for her tireless efforts throughout that period both as a Director and Chair of the Nomination Committee. We wish her well in her future endeavours.
UPDATE ON MERGER OF CLIG WITH KMI
CLIG announced the Proposed Merger with Karpus Management Inc on 9th June 2020 and subsequently a Prospectus to Shareholders was issued on 12th June 2020. The Merger was approved by shareholders on 13th July 2020. Completion of the Merger is on schedule, including KMI’s client approval process, and is expected to be completed on 1st October 2020.
As at 31st August 2020, KMI had US$3.6 billion of FuM compared with US$3.4 billion at 31st May 2020.
For access to the full Annual Report, please follow the link below:
http://www.rns-pdf.londonstockexchange.com/rns/8685Y_1-2020-9-14.pdf
CHAIRMAN’S STATEMENT
If ever the CLIG business model needed to be stress-tested for its capacity to withstand extreme volatility, the events of the last few months provided a test like no other in our 28-year history. Just a few weeks after suggesting that the prospects for equity markets appeared “promising” in my half- year report to shareholders, the full economic implications of the worldwide lockdown from the COVID-19 pandemic emerged in early March causing a stampede for liquidity and exodus from global equities that was unprecedented and indiscriminate in scale. In just 27 trading days between February 19th and March 23rd, most global equity indices fell by more than 30%, with the MSCI Emerging Market Index (M1EF) falling 31% to levels not seen since 2016.
Since the March nadir, massive monetary intervention from the G7 central banks has prompted a V-shaped recovery in equities that left the M1EF within 15% of its January 2020 high point at 30th June, yet trading on a forward P/E ratio of just 12.3. The contrast with ratings in the developed markets, which have been the main beneficiaries of the liquidity injection, is stark with the S&P 500 trading on 21.7 times forward earnings. While the lower ratings for emerging markets should offer some protection against future volatility, the risk of a second wave pandemic has left all markets both apprehensive and brittle. Notably, and in contrast to the extreme volatility in equities, the quest for safe- haven assets throughout the recent turbulence resulted in a 9% positive total return from US treasuries over the year to 30th June 2020, as measured by the Bloomberg Barclays US Treasury index.
Inevitably and in tandem with market volatility, CLIG’s FuM have gyrated significantly in recent months but, pleasingly, they rose by 2% over the full year to US$5.5 billion and now stand at US$6.0 billion as at 31st August 2020, within 4% of their all-time high. Our loyal client base and a dedicated effort from all of our employees in addressing a remote working environment over recent months, have combined to limit the impact of COVID- 19 to a manageable level. Of equal importance is the further significant progress achieved in growing the diversified products, notably the International strategy, which increased FuM by 71% in the year to US$1.2 billion and which now accounts for 23% of total FuM. While caution at the pace of the recent recovery is vital and prudence in managing our clients’ assets more important than ever, I believe there are solid grounds for optimism for CLIG shareholders going forward and this brings me on to the second major development of recent months:
Diversification
As I reported last year, a key strategic objective for the Group has been to diversify our revenue base away from undue reliance on a capacity-constrained emerging market universe. Alongside the organic development of our diversification products, which continues unabated despite the COVID-19 headwinds, we were also active for much of the last year in pursuing merger discussions with Karpus Management Inc. (KMI), a closed-end fund (CEF)-focused wealth manager, based in Rochester, New York with US$3.5 billion FuM. These discussions culminated in the Merger Agreement, which was announced on 9th June 2020 and explained in detail in the Prospectus sent to shareholders on 12th June 2020. I am pleased to report that shareholders have since voted overwhelmingly to approve the merger with 99% voting in favour.
Under the terms of the agreement, CLIG will acquire the entire issued capital of KMI in exchange for the issue of 24.1 million new CLIG shares, nearly doubling the size of your Company. With 60% of KMI’s FuM invested in fixed income assets on behalf of a high net worth (HNW) client base, this merger will provide a highly complementary fit to City of London Investment Management Company Limited’s (CLIM’s) equity- focused, institutional client business model. While the two operating companies will be run independently, the scope for operational efficiencies to be developed across both platforms should ensure both enhanced and less volatile returns for CLIG shareholders going forward. Completion of the KMI merger formalities is scheduled for 1st October 2020, at which point Tom Griffith will assume CEO responsibilities for the combined entity, while KMI will have the right to nominate two Directors to the CLIG Board in due course. As a result of close interaction between members of your Board and KMI management during the course of merger negotiations, I can say without hesitation that the positive chemistry between the two teams has been pivotal in cementing the transaction. Accordingly, we very much look forward to welcoming KMI’s 33 employees into the CLIG fold later this year.
Merger post-script
Throughout the extended negotiations with KMI over the last two years, financial advice to CLIG had been provided by Kevin Pakenham and his colleagues at Pakenham Partners and it was with huge sadness, therefore, that we learned of Kevin’s sudden passing on 19th July 2020, less than six weeks after the successful conclusion of those negotiations. For over 20 years, Kevin provided the Group with invaluable advice on a range of potential opportunities, often preferring to dissuade rather than persuade and the fact that he will not see our transformative transaction concluded is a great disappointment to all at CLIG. Our sincerest condolences go to his family and colleagues for their loss.
Results
The dislocation from the COVID-19 pandemic, referred to above, had a marked impact on our results for the final quarter of the year ended 30th June 2020, although, as stated earlier, a sharp recovery in FuM towards the year-end mitigated the full impact somewhat. Exceptional costs associated with the KMI merger amounting to £4.0 million will straddle both the 2019/20 and 2020/21 financial years. Of this total amount, £1.2 million has been charged to the income statement in the year to 30th June 2020 with a further c.£0.5 million relating to share issue costs being carried on the balance sheet to be capitalised in FY21 on completion. Since these costs are exceptional and non- recurrent in nature, I propose to confine my comments to the underlying results excluding merger-related charges since these present a more accurate comparison of our operating performance year-on-year.
Profit before tax for the full year was £9.4 million (2019: £11.4 million). Underlying pre-tax profits for the full year of £10.7 million were down 7% on the previous year due mainly to unrealised losses of £0.9 million, arising on our seed investments in REIT funds, compared with a corresponding gain of £0.8 million in the previous year. Diluted EPS for the year was 29.5p per share (2019: 34.1p). Underlying fully diluted earnings per share (EPS) for the year were marginally up by 1% to 34.4p per share (2019: 34.1p). As shareholders will be aware, the practice of seeding new products is integral to the development of a track record and while this can impact the Group’s financial performance in either direction, as the last two years demonstrate, your Board remains fully committed to both this practice and the REIT sector, as offering material long-term growth opportunities.
Year end FuM of US$5.5 billion were 2% ahead of the previous year’s closing figure, of which 69% was attributable to the core Emerging Markets product, compared with 78% in 2018/19. Despite a slight reduction in our average revenue margin to 75bp for the year (c.74bp for the month of June 2020), net fee income rose by 6% to £31.7 million, while continued tight cost controls resulted in total operating expenses of £13.0 million (before profit share and EIP charges), consistent with the previous year if merger-related costs are excluded. Additional charges of £0.9 million incurred in respect of the Employee Incentive Plan (EIP) were 9% higher than the previous year, reflecting a growing level of employee participation in the Plan. The EIP allows employees to forego a proportion of their cash bonuses to participate in share awards, with matching employer contributions, and this year will be the last in which these additional EIP charges will be incurred. The Board attaches great importance to the concept of employee equity participation as a means of aligning the interests of shareholders and employees. Over each of the four years in which the Plan has operated, more than 60% of our workforce has participated and this continues to be a key factor in achieving high levels of employee tenure, standing currently at an average of c.10 years across the Group.
Dividends
The established policy of distributing a relatively high proportion of net profits by way of ordinary dividends has been well received by our shareholders over many years and the Board’s objective is to maintain this policy notwithstanding a degree of profit volatility. In order to avoid undue swings in dividends and provide a relatively stable return to shareholders, the adoption of a 1.2:1 cover ratio is applied over rolling five-year periods, thereby providing an additional metric that helps smooth distributions notwithstanding year-on-year volatility. Despite recent volatility, our cover ratio has increased sufficiently in the current year for the Board to recommend an increase in the final dividend to 20p per share, making 30p for the full year, at which level the rolling five-year cover will be 1.25:1, after making full allowance for the exceptional merger costs referred to above. This final dividend of 20p will be paid on 30th October 2020 to those shareholders on the register at 9th October 2020. In parallel with the dividend policy, the Board has taken care over recent years to build meaningful cash reserves both to withstand negative shocks and fund potential exceptional costs such as those that have arisen in consummating the KMI merger. I hope shareholders will agree that our ability to increase dividends this year, despite the COVID-19 trauma and the exceptional KMI merger costs, amply justifies our ongoing policy of balance sheet prudence. As stated at the time of the announcement, this merger has the potential to be earnings accretive in the first year, thereby allowing CLIG to remain a debt-free company with sufficient positive cash flow to invest in both operating companies while rebuilding financial reserves.
Board
The changes among the executive members of the Board, which were highlighted in my interim statement, were fully implemented in the second half of the financial year. While Barry Olliff stepped down from an Executive to a Non-Executive (NED) role at the end of December, Carlos Yuste rejoined the Board at the same time as Head of Business Development. Together with Tom Griffith, Carlos has played a central role through much of this year in bringing the KMI negotiations to a successful conclusion, a feat made considerably more difficult by the COVID-related lockdown. Although the KMI merger has yet to be finally completed, I would like to extend my sincere appreciation to Tom and Carlos in advance of the merger closing date for their tireless efforts on behalf of the Group. As also noted at the interim stage, Tracy Rodrigues is now on leave of absence, having resigned from the Board at the end of March 2020.
Looking ahead to the year to 30th June 2021, the merger agreement with KMI includes the right to nominate two new Directors to the CLIG Board, one Executive and one Non-Executive, and a decision on those appointments will be made following completion in October. In tandem with these appointments, Barry Olliff has agreed to extend his tenure as a NED for an additional year to the 2021 Annual General Meeting. Through his long-standing professional contact with KMI’s founder, George Karpus, Barry was instrumental in opening exploratory merger discussions in 2018 and has played an important role in the subsequent negotiations. Realising the gains from this merger will involve a very considerable effort over the course of next year and, given Barry’s extensive experience at the CLIG helm, his wise counsel at the Board table through this period will prove invaluable. That apart, there were no changes among the NED members during the year but I would like to extend my warm thanks to them also for their unstinting support and advice through the exhaustive process of concluding the KMI merger.
Corporate Governance
The year to 30th June 2020 was the first year in which the 2018 UK Corporate Governance Code (Code), which places increasing emphasis on the need for corporate and social responsibility towards all stakeholders, took effect and over the course of this year we have devoted considerable attention to its implementation. For many years, we have strived to maintain high levels of transparency and ethical standards in the conduct of our business on behalf of shareholders, clients and employees and these efforts have continued this year as detailed later in this report. We are acutely aware that a strong corporate reputation and stakeholder loyalty can be lost in an instant through carelessness, risk or poor judgement, which is why your Board devotes considerable energy to monitoring these factors on a day-to-day basis. Nevertheless, while adhering closely to the concepts underlying good corporate governance, it is also our duty to highlight any areas where the Code, by which we are bound as a listed company, may not be fit for purpose and/or may clash with the CLIG ethos. In this regard, I would like to highlight executive remuneration.
The CLIG culture is rooted in a team-based approach from top to bottom, avoiding any hint of a star culture, which is common elsewhere in the asset management industry and which has led to some spectacular falls from on high. Rewards based solely on numerical performance can easily lead to undue risk-taking, as was so obviously the case in 2008 and just as we avoid performance- based fee structures for clients, we are also careful to avoid an overtly formulaic approach to measuring performance when rewarding employees. The simplicity of our business model is such that our financial results can be measured very accurately within days of each month end and, with no proprietary trading activities and a totally transparent allocation of profits to the employee bonus pool, we believe it is entirely appropriate to distribute executive bonuses in cash in a timely fashion, just as we pay shareholder dividends in cash and in a timely fashion. It is called alignment and this matches our culture and links rewards with shareholder expectations, and is in full accord with Principle ‘P’ of the Code. I strongly urge shareholders to read the Report of our Remuneration Committee on page 63 of the full Annual Report as this seeks to explain our approach to the issue of executive compensation in terms which we believe are demonstrably in the best interests of CLIG’s owners, as evidenced by our track record on employee tenure and comparative compensation levels.
However, this policy is somewhat at variance with the Code strictures which have been tailored in a one-size-fits-all framework that, inter alia, mandate significant deferral provisions. Despite compensation levels at CLIG being generally below our peer group, in some cases materially so, our average employee tenure is c.10 years with very low turnover. A comparison of average pay levels for the CLIG Executive Directors with those of four non FTSE 100, UK-listed institutional asset managers reveals that total compensation at CLIG is slightly over half that of our peer group. Yet this fact seems to be less relevant to proxy advisers, when making voting recommendations to their shareholder clients, than the fact that there is no tick in the box marked “bonus deferral” on their Code check-list. It is your Board’s view that, given the levels of total compensation paid to executive management, any move towards compliance with the Code in respect of deferral would only serve to increase our aggregate levels of executive pay, thereby harming the interests of our shareholders.
The Code requires that at least half the Boards of listed companies, excluding the Chairman, should comprise independent non-executive directors. CLIG supports this stipulation which is designed to ensure good governance by protecting the interests of public shareholders. However, finding suitably qualified candidates to meet this threshold is a challenging process which can take many months, following which an exhaustive process of induction, training and familiarisation is necessary. CLIG will undergo significant transformation over the next two years as the merger with KMI progresses. The importance of a smooth transition and guidance from familiar, experienced and long standing Board members to senior management through this period will be vital. The Board believes that it is therefore appropriate to temporarily suspend the rigid application of the provision that the Board, excluding the Chairman, should comprise a majority of independent directors. Proxy advisors all too often disregard the Code’s provision for flexibility. Your Board is aware of its responsibility to use such flexibility wisely and will share in more detail our plans for strengthening the Board’s independence over the next twelve months.
In this report to shareholders, we have set out the actions taken this year to meet as far as possible the requirements of the Code and we remain fervent supporters of the UK’s leadership role in corporate governance initiatives. However, we hope that shareholders will recognise that, when viewed objectively, there are certain areas where their interests may not be best served by an overtly prescriptive, box-ticking approach to governance responsibilities.
Outlook
In the absence of any certainty as to the course of the COVID-19 pandemic, it is impossible to predict with any confidence the outlook for the global economy in the coming year. The fact that central banks appear determined to provide significant offsetting monetary stimulus will mitigate the impact of a possible “second wave” but volatility will surely remain the order of the day. For CLIG, the more immediate task is to consolidate the KMI business and capitalise on the broader revenue base that the merger brings to the financial results. As I said one year ago, our strategic objective was to achieve the “go-to” manager label within the global CEF universe and the merger with KMI takes us firmly in that direction. With hard work and patience, I am confident that this will provide the Group with opportunities for growth as well as better defences against possible market headwinds.
Barry Aling
Chairman
10th September 2020
CHIEF EXECUTIVE OFFICER’S STATEMENT
This year marks significant milestones in the evolution of your Group as we continue to build upon the legacy created over the last 30 years. The first half of our financial year saw FuM reach US$6.0 billion at the end of December 2019. The business was then stress-tested by the global COVID-19 pandemic beginning in March 2020. Despite these uncertain times and extremes of market volatility, we have accomplished two of our long- standing diversification goals. The Group announced a corporate transaction in the form of its proposed merger with Karpus Management Inc. (KMI), and City of London Investment Management Company Limited (CLIM) continued to diversify through the growth of our non- emerging investment strategies which now represent more than a quarter of our FuM.
Our ability to accomplish these long standing objectives during this volatile period were as a result of a sound business model focused on long-term client relationships, a strong balance sheet, and committed employees. On reflection, the continued evolution of the business during this period of uncertainty has only been possible as a result of effective long-term planning and a team culture where, quoting the 19th century American writer Ralph Waldo Emerson, “Patience and fortitude conquer all things” resonates.
First and foremost in everyone’s minds globally has been, and continues to be, the COVID-19 pandemic. The security, safety and well-being of our colleagues, their families, and our communities has been a priority since the beginning of the pandemic. Although FuM dropped significantly during the initial stages of the pandemic and the related market volatility, we did not reduce employee headcount or make significant decreases in compensation levels. While during a normal economic downturn of this magnitude we would have taken these steps to control costs, in this case our strong balance sheet allowed us to follow a different path. As in any relationship, there is give and take based on the facts at hand, and in this case it was in the best interest of clients, shareholders and employees that we remained fully able to respond to what would come.
We began planning for such a scenario, including the possibility of a pandemic, more than a decade ago while evaluating our traditional ‘bricks and mortar’ offsite solution. At the time, we chose to change course and work towards a distributed business continuity model with employees working securely from home. Frequent and consistent testing of secure remote access technologies has been of paramount importance to successfully transitioning employees to working remotely for an extended period of time. As regions around the globe implemented quarantine measures, we closed our offices and employees worked from home successfully from day one.
As many of you know from reading our reports over the years, we have continued to search for CLIG diversification opportunities, even whilst the non-EM, organic diversification efforts at the CLIM level have made significant progress over the past several years. The proposed KMI transaction announced in June adds a second, separate investment management operating company under the CLIG holding company umbrella. KMI brings like-minded people, a similar culture and a robust fund management business. As both KMI and CLIM share a focus on investment in CEFs, we have gotten to know the Company, and specifically their founder and largest shareholder, George Karpus, very well. KMI is an investment management business with a complementary client base focused on the US retail and HNW marketplace versus CLIM’s institutional focus. We have had the opportunity to watch their business develop, get to know their core values, and monitor their performance and investment activity over multiple market cycles spanning more than ten years, which allowed us to see their commitment to their investment process and to their clients. Adding KMI will nearly double CLIG’s market capitalisation and we believe it will reduce the volatility of the Group’s earnings.
As New York City battled through increasing infection rates early in this pandemic, a news report reminded me of the previously mentioned Emerson quote when the report ended on an upbeat note with a focus on the two marble lions named Patience and Fortitude that stand watch outside the Beaux-Arts Public Library in Manhattan. The lions, initially commissioned in 1911, were renamed in the early 1930s by the city’s mayor at the time to represent the qualities that he felt New Yorkers would need to survive the deep economic depression being experienced during that period. These symbols of strength and resilience to New Yorkers during difficult times are representative of the culture at CLIG that stood out during this period of pandemic, quarantines, and market turmoil. My colleagues were of resolute mind and purpose in successfully managing your business and our clients’ assets.
Hard work is necessary, but not sufficient. Focus is necessary, but not sufficient. Grit is necessary, but not sufficient. A growth mindset is necessary, but not sufficient. Successfully navigating a growing business does not come from one singular thing, but rather a combination of many things over time. At the core must be sound planning, a patient company culture with the fortitude to keep calm and carry on when plans do not unfold as originally envisioned. I am proud to report that these core values shined through despite the global uncertainty, from both seasoned and newer colleagues, through to your Board of Directors.
Executive Director report
In this year’s version of the Annual Report and Accounts you will find a statement from the Group Director and Chief Investment Officer of CLIM, Mark Dwyer. Mark’s statement reviews the longer-term investment performance of the Group’s strategies and equity markets over the past year.
FuM flows and margin
The weighted average fee rate is c.74bp at FYE 2020, down from 76bp at FYE 2019, due mainly to the change in mix of assets in each strategy. Net inflows over twelve months in the International Equity CEF and Opportunistic Value (OV) strategies totalled c.US$600 million balanced by net outflows of US$275 million from the Emerging Markets (EM) strategy. The International and OV strategies now represent approximately 27% of FuM compared to 18% at this time last year. Net inflows of US$250 million across strategies is our current projection for the next year.
The EM equity asset class remains out of favour, specifically in the United States, which is where c.94% of our clients reside (by FuM). The EM strategy has seen outflows over the fiscal year due to a combination of factors including clients’ rebalancing after strong gains in EM over the second half of 2019. Some clients are also redeeming in order to meet operating expense obligations during the pandemic. The increasingly negative tone from the US government on the business practices of Chinese companies and the Chinese government overall is another factor putting pressure on the asset class.
The team managing the International strategy has seen steady inflows throughout the year, with net inflows received in eleven of the twelve months. Demand for International equity exposure by US-based investors is high, and the team has a compelling investment thesis and risk-adjusted performance.
The team managing the OV strategy thrives on volatile markets, and the March/April volatility provided this team with the ability to invest in historically wide discounts for our clients that are more “tactical” in nature. This strategy provides a nice diversifier to our business, as the clients are looking for a specific type of exposure, and return, usually over a defined time frame.
The Frontier CEF team had positive inflows during the year, but this has been muted by additional redemptions post-year end.
The REIT team continues to patiently build their return history, as most institutional investors want to see a five year return history before investing. The team did receive a subscription from an existing EM equity client who sought exposure to EM Real Estate.
As shown on page 7 of the full Annual Report, this is the fourth straight year of positive inflows for the International strategy. The strategy has gained momentum with support from multiple large consultants in the US, and strong relative performance on behalf of our clients.
CLIG share price KPI
CLIG Management has adopted two Key Performance Indicators (KPIs) based on the total return of CLIG over a market cycle, which are designed to provide shareholders with an indication of the return they should expect from owning the CLIG business.
The KPIs are:
| – | Our share price to compound annually at between 7.5% to 12.5% |
| OR | |
| – | Our share price to double the cumulative return of the M1EF |
Our goal is to achieve one of the two over rolling five-year periods. These measures are meant to stretch the management team, without incentivising managers to take undue levels of risk.
For the five years ending 30th June 2020, CLIG’s cumulative total return was 66.7% (10.8% per annum); this compares favorably with the 46.3% cumulative total return from M1EF. We therefore meet KPI #1, as the total return of 10.8% per annum is within the 7.5% to 12.5% target range. We do not meet KPI #2, as the total return did not double the cumulative return of M1EF, although it is outperforming M1EF over the five years.
For reference, since our listing in April 2006 on AIM through to 30th June 2020, CLIG’s cumulative total return was 471.0% (13.0% per annum), which outpaced the target range in the first KPI. For the second KPI, M1EF’s cumulative total return since CLIG’s inception was 143.7%, so the second KPI has been achieved since inception.
Karpus transaction
As summarised in the Prospectus released on 12th June 2020, the CLIG Board announced that it entered into a Merger Agreement to acquire the entire issued share capital of Karpus Management Inc. (KMI), a US based investment management business, on a debt free basis, to be satisfied through the issue of new CLIG shares. On 13th July 2020, CLIG shareholders were supportive of the deal, approving the transaction overwhelmingly. The deal is expected to close on 1st October 2020.
The Board believes that the merger will be of substantial strategic and financial benefit to the Group and for all shareholders. While CLIG and KMI share a focus on investment in CEFs for their respective clients, the two businesses operate in quite separate and distinct market segments. Your Board believes that the complementary nature of these two asset management businesses will serve to improve the stability of revenues and profits over time and thereby reduce CLIG share price volatility, and that the merger has the potential to be earnings accretive in the first full financial year following Completion. Importantly, however, the Group will remain a pure-play asset management business, and the Board believes that the performance of CLIM and KMI will have relatively low correlation in terms of earnings and asset class performance.
While we are confident that recent successes in achieving organic growth in the diversified products will continue, this transaction provides shareholders with the potential for a more stable and diverse source of income.
Group expenses and profitability
Operating profit grew by 9% to £11.6 million (2019: £10.5 million) as a result of increased net fee income of £1.8 million (6%) as compared to 2019. Profit before tax fell by 17% to £9.4 million (2019: £11.4 million) primarily due to unrealised losses on the Group’s seed investments in its REIT funds of £0.9 million and acquisition-related costs of £1.2 million charged during the year. As explained further in the Financial Review, total acquisition-related costs are estimated to be approximately £4.0 million. Of this total, £1.2 million has been charged to the current year’s income statement, £1.8 million is estimated to be charged to the income statement in FY 2021 and the balance of £1.0 million will be capitalised as share issuance costs in FY 2021.
Cash and dividends
We strive to be transparent in our approach to managing the balance between maintaining adequate cash reserves and, on the other hand, maintaining an attractive dividend stream for the benefit of our shareholders. We seek to maintain adequate cash reserves to weather exogenous shocks and to enable the Group to take advantage of transactional opportunities, both of which arose in the course of the fiscal year. We also aim to distribute dividends at a sustainable level, through market cycles in what we acknowledge is a potentially volatile (EM) asset class. While we take nothing for granted, we are grateful to have managed to navigate our way through the KMI transaction, sustain the market impact of the first few months of the COVID-19 pandemic, and to be prepared to distribute a dividend to shareholders that reflects the financial strength of the Group. As such, the Board is recommending a final dividend of 20p, which is an increase of 2p from last year’s final dividend. This follows the 1p increase to the interim dividend.
Inclusive of our regulatory and statutory capital requirements, there is £14.6 million in the bank in addition to the seed investment of £3.8 million in the two REIT funds. The previously mentioned transaction to merge with KMI will be completed by issuing new shares, leaving a significant level of cash in the bank, exclusive of acquisition-related costs of £2.3 million to be paid in FY 2021. We project that this cash allows us to manage the enlarged business through downturns without letting the external forces of lower fee revenue impact our service to our clients, or a reduced dividend to our shareholders.
Just as employees were retained during the recent period of uncertainty in order to ensure continuity for clients, our dividend payment rewarding the shareholders should reflect consistency with our dividend cover policy. Our dividend cover policy of 1.2x cover over a rolling five-year period remains ahead of the policy at 1.25x over the period and inclusive of the increased dividend. We will monitor, and report upon, the appropriateness of the 1.2x cover policy over the coming years, as we navigate the onboarding of the KMI business and cash flows.
Dividend cover template
On 12th June 2020, the Group published the combined circular and prospectus in relation to the share consideration to be issued to stockholders in KMI on completion of the merger. The prospectus remains live until admission of those consideration shares on completion, currently expected to occur on 1st October 2020. Whilst the prospectus remains live, the Company is prevented under the Prospectus Regulation from providing our normal dividend template without the approval and publication of a supplementary prospectus. We will address this matter after the completion of the transaction.
EIP
We continue to be pleased with the enthusiasm that employees demonstrate for the CLIG Employee Incentive Plan (EIP). This plan allows employees to allocate a portion of their profit share, which is matched by the company, to purchase shares of CLIG that vest over the following five years for the Executive Directors and over three years for the rest of the employees. 65% of employees participated in the plan for FY 2020. In 2016, when the plan started, shareholders had previously approved an additional 5% of the pre-tax, pre-bonus, operating profit to cover the charge of implementing the plan. Our financial year-end 30th June 2020 is the final year for this 5% allocation, and thereafter, these awards will fall within the 30% limit of the existing profit share pool allocated to employees. We anticipate that a similar plan will be created for KMI employees, to encourage ownership of CLIG shares.
Update on finance department
As announced on 31st December 2019, Tracy Rodrigues, Group Finance Director, requested a leave of absence for family reasons and stepped down from the Group Board on 31st March 2020. Deepranjan Agrawal was hired in January 2020, and became the Head of Finance as of 1st July 2020 reporting directly to me, and manages the established and stable Finance team.
Deep’s experience includes over sixteen years with Deloitte and recently three years with RSM in their audit practice within the asset management industry. Deep has a wealth of relevant knowledge having served a range of clients in the asset management industry including large and small investment managers, Investment Trusts and UK authorised funds. Deep completed his Master of Commerce degree from the University of Pune, India and is a Chartered Accountant.
Corporate governance and stakeholders
In his Chairman’s Statement, Barry Aling makes clear that we welcome the changes and increased disclosures in this Report that come as a result of the 2018 UK Corporate Governance Code. We address our increased reporting obligations under Section 172 of the 2006 Companies Act on page 44 of the full Annual Report. You will also find increased disclosures on our remuneration policy, KPIs, and other corporate governance topics throughout the document.
We have always, from the issuance of the first Annual Report and Accounts after becoming a public company in 2006, explicitly recognised that the Group exists for the mutual benefit of our three primary stakeholders – clients, employees and shareholders.
I echo the Chairman’s comments regarding our Group’s culture of transparency and disclosure, and am in full agreement with him that CLIG will not blindly follow guidance if it does not reflect the best way for our business to be managed on behalf of our clients, employees, and shareholders. We will always recognise and balance the interests of our various constituencies in the management of your Company.
Barry Olliff intended share stake
After his retirement on 31st December 2019 on his 75th birthday, CLIG’s Founder Barry Olliff agreed to the Board’s request to complete his term as a Non-Executive Director. Now that the KMI transaction has been announced and is moving towards completion, the Board would like to extend Barry’s role on the Board for a final year to maintain continuity and retain his insight and expertise.
Shareholders are reminded of Barry’s previously-stated intention to sell 330,613 shares at 450p, which is the balance of his 500,000 planned sale at that level, and then 500,000 shares at each of 475p and 500p, subject to relevant restrictions. As per listing rules, any share sales will be announced to the market after execution.
Barry is supportive of the transaction with KMI, and reinforced that support with his announced purchases of CLIG shares on both 19th June and 30th June, following the announcement of the proposed transaction. Barry intends to remain a large shareholder in CLIG post-transaction, but will continue to sell shares at the aforementioned levels in order to achieve his personal estate planning goals.
CLIG outlook
In conclusion, the efforts and support of my CLIG colleagues must be acknowledged. Thank you for your patience and hard work during the unique circumstances driven by the pandemic. And, on my behalf, please extend a thank you to your spouses, family, roommates, and other relationships for any inconveniences caused by working remotely during the pandemic. We look forward to having you in our offices again when it is safe and acceptable.
Secondly, thank you to our shareholders for your overwhelming support of the KMI merger. The Board and management are excited about the future of the combined entity and believe that the two investment management Companies (CLIM & KMI) will create an enduring and well-balanced company. We look forward to integrating the strong-performing KMI team into the CLIG framework and supporting two growing businesses.
Our focus on clients, employees, and shareholders will continue to be the way we look at our business. Our culture has been created to recognise and consider all of our constituencies, and it extends to the families of employees, communities in which we do business, communities in which our employees live, as well as the regulations that impact our business. With the components of a sound business model, strong balance sheet and committed employees, CLIG continues to evolve as intended and is well positioned for the year to come.
Tom Griffith
Chief Executive Officer
10th September 2020
