U.K.-based City of London Investment Group (LSE:CLIG, Financial) is an institutional asset manager focused on closed-end fund investments. As of the end of fiscal 2019, the company manages nearly $5.4 billion in funds, mainly for institutional clients (3.5% in European accounts, 93.1% in U.S. accounts and 3.4% in other accounts).
Through a consistent track record of outperformance, City of London Investment Group earned its reputation in the closed-end fund space. In the investment world, this is a rare asset class, where the market efficiency hypothesis no longer applies. The companys principal investment strategy is to benefit from the narrowing discount on CEF to net asset value through a variety of corporate actions, including open-ended, tender offers and liquidation. The closed-end fund discount has been a mystery for decades, and as long as the phenomenon continues to exist, the company can rely on the same old approach to add value to clients in the foreseeable future.
City of London Investment Group was established in 1991 by Barry Olliff, who then had already accumulated more than 20 years of experience in the closed-end fund sector and recognized the opportunity to expand into emerging markets. Since then, Olliffs efforts and commitment have built the companys value-driven and prudential culture, which is rare among many asset managers. Per the latest filing, the founder owns 7.6% of total shares outstanding, while the other individual insiders hold 9.6% in aggregate. Investors should be aware that Olliff just retired from his long-standing roles of CEO and chief investment officer and will be retiring from the executive director role at the end of this year, though he is going to remain available as a consultant for another two-year period. At the same time,he claims he will sell his company shares only when the price is above specific levels after his retirement.
We believe the companys expertise in the closed-end fund strategy should protect the business from significant headwinds that most asset managers have been struggling with, including the race to zero (fee) and the rise of passive investing. Beating the market is the most significant value of an active money manager. City of London Investment Group has a decades-long track record of outperforming its benchmark, which takes time and effort for its peers to replicate from ground zero. Moreover, staying within the circle of competence in the closed-end fund niche, which may not be lucrative enough for larger-scale firms to allocate a large number of resources, would automatically fend off competition.
Per the chart below, City of London Investment Group consistently earned a top-notch return on assets among our select group of asset managers, including Federated Investors (FII, Financial), T.Rowe Price (TROW, Financial), Ashmore Group (LSE:ASHM, Financial), Eaton Vance (EV, Financial) and Cohen & Steers (CNS, Financial).
Although City of London Investment Group is most reputed in the emerging markets, closed-end fund investing, management has been diversifying the business with the development of a range of non-emerging market products (i.e., Developed, Frontier and Opportunistic Value). We noticed that these extension products represent 22% of the total assets under management at the company at the end of fiscal 2019 (compared to 18% in the previous year and less than 10% in 2015). Moving forward, the company can continue to launch new products in adjacent areas within or related to the closed-end funduniverse (e.g., real estate investment trust). Considering the loyal client base, we think that cross-selling may well support further market penetration.
In the meantime, the company keeps signing up new clients, attracted by the outstanding performance of its investment strategies. Over the past three years, approximately 20 new clients with total funds of $300 million, on average, came on board each year.
On the risk front, we noticed the companys client base is overwhelmingly based in the U.S., indicating a concentration risk on a regional level. The founders retirement is another short- to medium-term factor, as discussed previously. Lastly, the closed-end fund investing business is sensitive to the financial market and the overall economy. As shown below, both revenue and operating income dropped in 2009 during the financial crisis.
Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of City of London Investment Group.
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