Final Results

RNS Number : 9350Y

City of London Investment Group PLC

14 September 2009

 



14th September 2009

CITY OF LONDON INVESTMENT GROUP PLC

('City of London', 'the Group', or 'the Company')

PRELIMINARY RESULTS FOR THE YEAR TO 31st MAY 2009

City of London Investment Group PLC (AIM: CLIG), a leading emerging market and natural resource asset management group, announces preliminary results for the year to 31st May 2009.

SUMMARY

• Funds under management at 31st May 2009 were US$3.5 billion (2008: US$4.7 billion), a decline of 26% compared to a fall in the benchmark emerging market index (MXEF) of 36%

• Funds under management at 31st August 2009 were US$4.0 billion, a rise of 13% since the financial year end compared to a rise of 9% in the MXEF

• Unprecedented market volatility during the period with the MXEF falling by some 70% to its low before recovering significantly by our year end

• Profit before tax down 50% to £5.4 million (2008: £10.7 million)

• Basic earnings per share down 45% to 16.1p (2008: 29.3p)

• Recommended final dividend of 10p per share (2008: 13.5p), payable on 20th November 2009 to shareholders on the register on 30th October 2009, making a total for the year of 15p (2008: 19.5p)

• Good progress made on diversifying the Group's product offering with the award of a first mandate to invest in closed end funds in developed markets and the launch, post period end, of a fund investing directly in Asia ex-Japan equities

'We believe that leveraging our expertise in closed end funds and global markets represents a risk-managed route to enhancing the quality and stability of the Group's earnings and is a strategy which plays to our proven strengths.'

Andrew Davison, Chairman

'In my opinion, what we should be attempting to do is to reward clients (who pay the bills) with superior returns, our shareholders (who own the business) with significant dividends and capital growth and our employees (who manage the business) with relative security and participation in the firm's success. If we can continue to achieve these three goals relatively fairly I would hope that we will be one of the survivors as many parts of our industry are restructured.'

Barry Olliff, Chief Executive Officer

For further information about City of London, please visit www.citlon.co.uk or contact:

Doug Allison (Finance Director)	Simon Hudson / Andrew Dunn
City of London Investment Group PLC	Tavistock Communications
Tel: [phone]	Tel: [phone]
Jeff Keating	Jeremy Ellis / Chris Sim
Singer Capital Markets Ltd	Evolution Securities Limited
Nominated Adviser & Joint Broker	Joint Broker
Tel: [phone]	Tel: [phone]

  Chairman's Statement

From the end of May 2008 to the end of May 2009, the MSCI Emerging Markets Index (MXEF) fell by 36%. Our funds under management (FuM) declined by 26% over the same period to end the year at US$3.5 billion, or £2.2 billion, (2008: US$4.7 billion or £2.4 billion). Since our year end, the MXEF has risen by 9% to the end of August while City of London's FuM have increased by 13% to US$4.0 billion, or £2.4 billion.

The period end comparisons to MXEF mask considerable volatility in emerging markets during the year with the index at the end of May 2009 being some 70% above the lows in October 2008. Volatility is not new to us, and our investment model has been honed over our history in an attempt to provide clients with outperformance against benchmarks in both falling and rising markets. Indeed, during the almost unprecedented volatility of emerging markets over the last two years, the Group has added significant new FuM from both existing and new clients as recognition of the virtues of our approach has increased.

Results

Fee income, predominantly US dollar denominated, for the year to 31st May 2009 fell by 19% to £20.2 million (2008: £24.9 million) reflecting the significantly lower FuM resulting from the falls in emerging markets during the second and third quarters but benefitting from the relative weakness of sterling during most of the period.

Profit before profit share, interest and similar income, impairment charges and tax declined by 41% to £8.6 million (2008: £14.5 million). Pre-tax profit declined by almost 50% to £5.4 million (2008: £10.7 million), after £2.8 million of profit related staff payments (2008: £4.7 million), reduced interest receivable of £0.1 million (2008: £0.4 million) and a £0.2 million loss on liquidation of seed investments (2008: gain of £0.4 million). After a reduced tax charge of £1.5 million, representing 29% of pre-tax profits (2008: £3.6 million representing 33% of pre-tax profits), basic earnings per share were 16.1p (2008: 29.3p), a decline of 45%. Diluted earnings per share were 15.0p (2008: 26.0p).

The Group ended its financial year with cash balances of £4.7 million (2008: £5.5 million) and no borrowings (2008: same).

Dividends

Shareholders will be aware that City of London's dividend policy is based on paying dividends that are covered approximately one and a half times by full year earnings per share. Although the Board has no plans to change this policy, a temporary reduction in earnings cover has been applied this year in determining the level of dividends. This is a reflection of the exceptional market conditions, our expected strong cash position and the recovery in our markets and FuM since our year end. As a consequence, the Board is recommending a final dividend of 10p per share (2008: 13.5p), making a total for the year of 15p (2008: 19.5p), covered 1.06 times by earnings per share (2008: 1.50 times). The final dividend will be paid on 20th November 2009 to shareholders on the register on 30th October 2009.

Operational highlights

The Group took the decline in the markets as an opportunity and maintained its focus on organic growth, both in terms of new products and geographical expansion of the client base.  We made good progress on both fronts.

In the US, we received our first mandate - of some US$100 million - to invest in developed markets via closed end funds and recruited a fund manager to support this new product area. In the UK, shortly after the year end on 1st July, we launched the Asian Value & Growth fund (a spoke of the World Markets Umbrella Fund), which will invest directly in equities in Emerging Asia. Again, a senior fund manager specialising in Asian investment was appointed to provide the necessary expertise for this product, which is currently being marketed to UK institutional investors before roll-out, once a track record has been established, to the Group's client base in North America.

Towards the end of 2008 a marketing manager was appointed to implement our decision to bring our US marketing in-house, and ultimately therefore to avoid the commissions which we have historically paid to North Bridge Capital who have served us well since we started the US marketing activity. He will be responsible for developing direct relationships with the consultant industry which advises institutional investors.

These developments are reported in more detail in the Chief Executive Officer's Review.

Outlook

From the lows recorded following the collapse of Lehman Brothers in September 2008, emerging markets recovered strongly to our financial year end. The recovery has continued into our new financial year as investors recognised that the prospects for many emerging markets are better, in both the short and longer term, than those for developed economies. This is not to say that we believe there will be no further volatility but we anticipate that the very pronounced troughs and peaks of the last year will be moderated.

The comparative attractions of emerging markets for our core institutional clients has led, and is still leading, to the commitment of new money to the asset class as evidenced by the outstanding commitments to be funded in excess of US$500 million, which will benefit FuM in the current year. In addition, investors are becoming receptive to increased weightings in the natural resource sector following the protracted period when they were out of favour.

We plan to take advantage of these trends by continuing to diversify our product offering with an increased focus on natural resources and the launch of both the Asia Value & Growth fund (investing directly in Asian equities ex-Japan) and the Emerging Markets Value & Growth fund (also investing directly in equities). Additionally, as noted above, we have been mandated to manage a new global closed end funds account. We believe that this leveraging of our expertise in emerging markets and in closed end funds represents a risk-managed route to enhancing the quality and stability of the Group's earnings and is a strategy which plays to our proven strengths.

Andrew Davison

Chairman

10th September 2009

  Chief Executive Officer's Review

'In my opinion, without additional new bad news, if this market follows its predecessors, MXEF in 2009 will have appreciated between 50% and 75% before there is the first sign of good news. This is what occurred in 1999 and 2003 after similar falls under similar emotional circumstances in our asset class'

Extract from the CEO review - January 2009

Extreme emotional behaviour

I have reproduced above a paragraph from my review at the time of our Interim Report, not just because the markets have appreciated significantly from then, but rather to demonstrate yet again the extreme emotional behaviour demonstrated by our asset class.

Placed in context, from the low of 450 in October 2008 the MSCI Emerging Markets Index (MXEF) rose 75%, virtually uninterrupted over the next seven months. You will recall that this was around the time of some of the initial references to 'green shoots' in May, which coincided with our year end.

Since the end of May, MXEF rose to around 870 in August, an increase of just over 90% from the low.

Our FuM have appreciated similarly, from US$1.95 billion in October 2008, doubling to just over US$4 billion at the beginning of August. However to compare like with like, and to measure the actual progress that we are making, I would suggest using straight index tracking which would mean that we would be managing US$5.4bn if we returned to the high that the index achieved in October 2007, at which time we were in fact managing US$4.95bn. This figure of 'index-adjusted' FuM excludes monies won via new mandates as yet unfunded that are referenced under the 'New mandates' heading later in this statement.

Returning to the theme of 'extreme emotional behaviour', what should happen over the next few months based upon precedent is that our asset class should now take a breather for quite some time. After the rises of 1999 and 2003 it took at least a year before further highs were established, and whilst I'm not suggesting that the circumstances are similar this time around, the emotional behaviour of participants within our asset class will in my opinion be similarly demonstrated. The index will have increased in value too far too fast and there will be some time taken for reflection prior to any further significant advance.

Since the low last October, we have been focusing our business with two objectives in mind:

1. Diversification

We have established that our shareholders, our staff and, I would suggest, our clients do not like our asset class' volatility. Volatility equates to risk and risk leads to insecurity. Whilst our shareholders understand both what we do and how we attempt to mitigate risk, our staff, even in a year when we outperform our benchmarks, potentially receive significantly smaller bonuses. By diversifying our business, employees, and in particular our investment management staff, will benefit in the same manner as shareholders, and so interests are aligned.

In this regard therefore, we have been attempting to diversify our business in a number of ways, some of which have been, very unusually, successful in the short term, while other initiatives are taking us longer to deliver. A recent success has been the winning of a substantial mandate that is to be invested in the MSCI All Country World Index (ACWI) ex US. This is a Closed End Fund mandate and is becoming a significant area of focus for us using the well established volatility of Closed End Fund pricing as the major source of alpha generation.

Other areas of diversification involving our Emerging Markets Closed End Fund business include the Emerging Markets Plus Fund which allows us opportunistically to invest in Developed Markets when the Emerging Markets are considered to be too high or when the Developed Markets are attractively priced. That Fund, which when initially funded at the end of March 2009 had assets of US$17 million, is now US$43 million (end August) after an additional subscription of US$23 million and then a rebalancing redemption of US$10 million at the end of June.

Our Equities (as compared to Closed End Funds) Group has also developed. We recently added both an Asia Value and Growth spoke to The World Markets Umbrella Fund (our Dublin based mutual fund) and created a new Delaware Statutory Trust (DST) called Emerging Markets Value and Growth, with the intention of marketing these funds to institutional investors after they have established first or second quartile performance track records.

2. Employees

As referenced in the Interim Report we have not made any of our staff redundant during the difficult market conditions of the past year or so. This is for two reasons with which you are familiar:

i) We run a low cost business. We do not spend what we consider to be shareholders' money unnecessarily. Our offices are by no means the most fancy, and when we travel we do not stay in expensive hotels or use corporate jets! Neither are we great entertainers, believing that good investment performance is what counts as an aid to winning mandates.

ii) Our business model is (particularly as our asset class is risky) as risk averse as possible. We do not agree with very long term plans, knowing that markets (as we have just witnessed) can derail them. Also we do not overstaff. We attempt to use staff flexibly, increasing the head count only when we are sure that in so doing we would not potentially create a position only to find that we were then forced to reconsider due to changed market circumstances.

Obviously we are fortunate in this regard as we still remain small. I expect that as we grow some of these values will be compromised, but to the extent that we can be careful with the allocation of our human resources, I would suggest that this should be for the benefit of our shareholders, our clients, and ultimately our staff.

However, having just implied that we do not take any risks, we have in fact taken on a number of experienced staff to fill certain specialist positions in support of our diversification plans. In this regard we were taking on staff at a point when other fund managers were letting staff go for whatever reason.

The areas involved (all of which are areas of diversification) are as follows:

• Asian Equities

• Developed Closed End Funds

• Absolute Return

• US Marketing

• Asia Marketing

Asian Equities, Developed Closed End Funds and Absolute Return are all product specific. However US Marketing, as referenced in the Interim CEO Review is a new position created as a result of the end of our agreement with North Bridge Capital, who have been our third party marketing provider for many years. This agreement ends in October and we decided well over a year ago to make an internal appointment that would enable us to benefit and keep 100% of the new fees generated from US assets going forward subsequent to October. There is one exception to this: one consultant relationship has been left with North Bridge Capital for one further year.

In addition, we have made an appointment in our Singapore office to explore marketing opportunities in Asia. We hope that as we diversify our business further we will be able to continue to develop our business in Asia potentially with new products from our Equities Group.

Investments

We now hold positions in three CLIM (City of London Investment Management) Funds. These positions have been taken to facilitate the development of a performance record in each of these areas. In each case, at the point that the requisite record has been established these investments will be reduced and ultimately liquidated. In the case of the Global Equity Fund these assets have been reallocated to the newly-launched funds. As can be seen below these investments total US$3.543 million as of the end of July.

	Market value
Seed investments	31 May 2009 US$'000	31 July 2009 US$'000
US DST's
Global Equity Fund	400	-
Emerging Markets Value & Growth	-	1,000
World Markets Umbrella Fund (Dublin)
Natural Resources	296	306
Asia Value & Growth	-	2,237
Total	696	3,543

Exercise of options

In my Interim Review I gave notice that I would be intending to exercise an option over 189,000 shares at 29p prior to its expiry in May this year, and would be intending subject to market conditions to simultaneously sell around half of the resulting shares that I purchased. However, as a result of changed market conditions I took up the entire position and have no present plans for disposing of any shares.

New mandates

As referenced earlier we have been successful in winning a number of new mandates. As of the end of August these were in excess of US$500 million. We expect these mandates to be funded over the next few months.

The financial services industry

I really had hoped that our industry had learnt some lessons as a result of what had happened over the past few years, but unfortunately already the signs are not good in this regard. In many instances (yet again) the rewards paid to staff seem to be out of all proportion to the gains left over for shareholders. In the US it seems that there is still a need to legislate away structural weaknesses with more and more time consuming and expensive regulation.

I had hoped that the managements of the companies that have demonstrated some of the worst excesses would have been held accountable by shareholders and thus would not have survived. But in the event this has not, at least at the present time, occurred.

I fear that what will in fact happen is that when the wake up call arrives the restructuring of our industry will be significantly broader and will leave significantly more scars than anyone could at present foresee. In my opinion the barriers to entry within many areas of the financial service industry are not high and it is inevitable that what are now considered very well capitalised emerging market banks and other institutions will assume a significant role within this industry over the next few years. It can be seen that there are many precedents for what I am suggesting. You just have to look around the changing competitive landscape for other consumer products around the world (separate from financial service products) to see the potential.

For our part we are determined to continue to run a competitive business that avoids many of the structural weaknesses demonstrated by our peers.

In my opinion, what we should be attempting to do is to reward clients (who pay the bills) with superior returns, our shareholders (who own the business) with significant dividends and capital growth, and our employees (who manage the business) with relative security and participation in the firm's success. If we can continue to achieve these three goals relatively fairly I would hope that we will be one of the survivors as many parts of our industry are restructured.

Retirement plans

At the end of this year I will be 65, and subject to approval from the Board and also from my colleagues and from shareholders, I would like to stay on in my present position until I'm 70, and then to retire. The exact date of my retirement could obviously be managed to suit all parties. Over the next few years I will gradually be delegating certain responsibilities to ensure a smooth handover.

CLIG employees

I would again like to thank staff for their support and hard work in what has continued to be a volatile and testing environment.

Barry Olliff

Chief Executive Officer

10th September 2009

  Financial Review

Consolidated income statement

The financial year 2008-9 comprised four very different quarters, so far as profit was concerned. The year opened strongly on the back of funds under management (FuM) of US$4.7 billion and, despite some significant market erosion, averaged US$4.2 billion across the first three month ends. This relative stability ended suddenly in the quarter to end November 2008, as stock markets around the world fell precipitately, causing our monthly average FuM for the quarter to decline to US$2.6 billion. At the mid-year point FuM stood at a disappointing US$2.1 billion. The recovery from the low point began slowly during the third quarter as monthly average FuM rose to US$2.3 billion, and accelerated in the final quarter of the year as global markets rose rapidly, with emerging markets leading the way. Average monthly FuM for the fourth quarter was slightly over US$3 billion and the year end position was US$3.5 billion.  In percentage terms, from the start point of US$4.7 billion FuM fell by 60% during the first half year, and then rose by 80% to the year end figure. Some of that recovery was the result of new money, but nevertheless the figures are indicative of a level of volatility which was perhaps without precedent.

Unsurprisingly, given this background, fee income and therefore profitability was healthy in the first and fourth quarters but significantly impaired in the second and third quarters. Overall, for the year as a whole, fee income was £20.2 million (2008: £24.9 million) and while the year on year reduction was as unforeseen as it was marked, the fact that the year closed relatively strongly provided a considerable degree of comfort.  The Group's FuM and income in sterling terms was smoothed by the 18% decline in the sterling/dollar exchange rate - in sterling the starting and ending FuM for the year were £2.4 billion and £2.2 billion respectively.

Administrative expenses were reduced but, net of the inflationary impact of the fall in the £/US$ exchange rate, that reduction was only marginal, from £15.0 million to £14.5 million. Variable costs - commission paid on fees plus the profit share pool - fell back and as a result the overhead component of total administrative costs rose from 45% to 60%. The increase was principally attributable to people costs and systems, natural enough given that these two make up 75% of the fixed cost base (2008: 74%). Although reflecting an increase in headcount from 52 to 58 and some investment in systems (and in particular in the adoption of the Charles River front office system), in reality by far the most significant driver of the higher costs was the weakness of sterling, not just as it related to our US office costs but also, although less materially, as it related to the costs of the Singapore and Dubai offices.

In the half year results we took a write down of £0.7 million against our seed investments, reflecting a fall in value from original investment. As markets recovered during the second half, the charge to the income statement for the full year was reduced to £0.4 million (coincidentally almost precisely matching the gain of £0.5 million taken to profit in the preceding two years).

Pre-tax profit of £5.4 million represents a fraction over 50% of the previous year's £10.7 million. The tax charge is equivalent to 28.6% of pre-tax profits (2008: 33.3%) with the change resulting from the reduction in the UK corporation tax rate to 28%, the changing mix of business as apportioned under the Group's transfer pricing policy and a small write back of tax accrued in prior years. Profit after tax was £3.8 million (2008: £7.1 million).

Consolidated balance sheet and statement of changes in shareholders' equity

Dividends paid to shareholders during the year totalled £4.4 million, being £3.2 million for the 13.5p final dividend for 2007/8 and £1.2 million for the current year's interim dividend of 5p per share. The equivalent numbers for the previous year were £1.7 million (7p) final and £1.5 million (6p) interim, making a total of £3.2 million. None of the other components of the change in shareholders' equity impact cash in the current period.

The revaluation reserve, reflecting the valuation of seed investments, was effectively eliminated during the year as value declined by £0.4 million, reversing the prior year upward revaluation of £0.5 million. The share option reserve was reduced to £1.8 million (2008: £3.5 million) based upon the effect on deferred tax of the change in price of the Group's shares, which stood at £2.285 at 31st May 2009 (31st May 2008: £3.35). Also with respect to share options, a receivable of £1.2 million has been recorded to reflect the anticipated recovery of corporation taxes in both the UK and the US in respect of share option exercises during the four years ending in May 2009, as the corporation tax filings had not hitherto acknowledged the deduction available against taxable profits. The net effect of these movements, together with the share-based payment charge of £0.1 million (2008: £0.1 million), was to reduce total equity from £9.8 million to £8.7 million.

Cash remains the major part of net assets: £4.7 million representing 54% of the total (2008: £5.5 million; 56%). The reduction in cash reflects the excess of the net cash used in financing activities at £4.1 million (2008: £9.0 million) over the net cash generated from operating activities of £3.3 million (2008: £7.4 million). Current and deferred taxes represent receivables of £2.2 million (2008: £1.5 million), including the reclaim of £1.2 million of prior year taxes as noted above. Investments in property and equipment and in financial assets total £1.3 million (2008: £2.2 million), and the balance of the total net assets of £8.7 million (2008: £9.8 million) is represented by net trade receivables/payables at £0.5 million (2008: £0.5 million).

Currency exposure

The strength or weakness of sterling relative to the US dollar has, and most likely always will have, a significant influence on reported earnings, as the Group's income is derived almost entirely in US dollars, whereas close to half of its expenses are incurred in sterling. As observed many times before, there is an inbuilt natural hedge, as US dollar fee income will tend to rise as the dollar weakens and fall as the dollar strengthens, assuming that the weakness/strength is reflected in the dollar's value relative to the currencies that underlie the funds under management. Ultimately, in effect, it is the value of sterling relative to those underlying currencies that feeds through to earnings. Nevertheless it is helpful to consider the table below, which illustrates the impact on post tax profits of moves in the dollar/sterling rate, ceteris paribus:

	FuM - US$bn
	3.0	3.5	4.0	4.5
US$/£	Post-tax, £m
1.55	4.2	5.5	6.9	8.2
1.60	4.0	5.3	6.6	7.9
1.65	3.8	5.1	6.4	7.6
1.70	3.6	4.9	6.1	7.3
1.75	3.5	4.7	5.9	7.1

Assumes: 1. Average net fee 87 basis points, 2. Annual operating costs £4.0 million plus US$6.5 million, 3. Profit share equivalent to 30% of operating profits, 4. Average tax rate of 31%

The table illustrates annualised profits - for example at constant FuM of US$4.0 billion, and at a constant exchange rate of 1.65, post-tax earnings might be expected to be around £6.4 million, whereas the same level of FuM would generate £6.9 million post-tax at an exchange rate of 1.55.

While the group does not aim to lock in the sterling value of future revenues by hedging, a portion of anticipated income is sold forward principally as a mechanism to hedge the long dollar position in the balance sheet (i.e. essentially accrued fees plus certain of the seed investments). At 31st May these forward sales amounted to US$3.6 million at an average rate of 1.7694 (2008: US$6.2 million at an average rate of 1.9716).

Share options

As at 31st May 2009 there were 3,135,022 options on ordinary shares outstanding (2008: 3,958,310). Of those outstanding options, 1,262,375 (2008: 1,458,310) relate to shares held by the Employee Share Option Trust, and the balance of 1,872,647 (2008: 2,500,000) relate to new shares that would be issued at exercise. The reduction in the number of dilutive options reflects the exercise of 621,103 options, which increased shareholders' equity by £0.3 million, and the lapse of 6,250 options. At the period end dilutive share options therefore represent 7.2% (2008: 9.9%) of issued share capital.

Doug Allison

Finance Director

10th September 2009

Consolidated income statement

For the year ended 31st May 2009

	Note	Total 2009 £	Total 2008 £
Revenue		20,151,149	24,878,839
Administrative expenses
Staff costs		6,716,230	7,925,916
Other administrative expenses		7,462,602	6,968,479
Depreciation		288,918	158,474
		(14,467,750)	(15,052,869)
Operating profit	2	5,683,399	9,825,970
Interest receivable and similar income	3	(60,177)	868,870
Impairment of seed investments		(238,790)	-
Profit before taxation		5,384,432	10,694,840
Income tax expense	4	(1,537,649)	(3,559,124)
Profit for the period		3,846,783	7,135,716
Basic earnings per share	5	16.1p	29.3p
Diluted earnings per share	5	15.0p	26.0p

Consolidated balance sheet

31st May 2009

	Note	2009 £	2008 £
Non-current assets
Property and equipment		801,554	296,740
Other financial assets		57,535	52,048
Deferred tax asset		1,605,855	3,208,323
		2,464,944	3,557,111
Current assets
Trade and other receivables		2,868,398	3,573,214
Current tax receivable		608,965	-
Available-for-sale financial assets		431,365	1,861,375
Other financial assets		-	30,335
Cash and cash equivalents		4,718,766	5,498,910
		8,627,494	10,963,834
Current liabilities
Trade and other payables		(2,349,334)	(3,068,821)
Current tax payable		-	(1,487,571)
Creditors, amounts falling due within one year		(2,349,334)	(4,556,392)
Net current assets		6,278,160	6,407,442
Total assets less current liabilities		8,743,104	9,964,553
Non-current liabilities
Deferred tax liability		(1,424)	(193,177)
Net assets		8,741,680	9,771,376
Capital and reserves
Called up share capital	7	259,816	253,605
Share premium account		1,518,441	1,357,283
Investment in own shares	8	(2,633,932)	(2,811,878)
Revaluation reserve		3,661	450,747
Share option reserve		1,767,730	3,468,673
Capital redemption reserve		14,172	14,172
Retained earnings		7,811,792	7,038,774
Total equity		8,741,680	9,771,376

Consolidated statement of changes in shareholders' equity

31st May 2009

	Share capital £	Share premium account £	Investment in own shares £	Revaluation reserve £	Share option reserve £	Capital redemption reserve £	Retained earnings £	Total £
At 1st June 2007	267,777	1,357,283	(1,573,525)	457,471	2,519,442	-	7,685,181	10,713,629
Purchase of own shares	-	-	(1,590,642)	-	-	-	-	(1,590,642)
Share option exercise	-	-	352,289	-	-	-	-	352,289
Share cancellation	(14,172)	-	-	-	-	14,172	(4,544,432)	(4,544,432)
Increase in fair value*	-	-	-	202,136	-	-	-	202,136
Released on disposal	-	-	-	(208,860)	-	-	-	(208,860)
Share based payment	-	-	-	-	141,083	-	-	141,083
Deferred tax	-	-	-	-	808,148	-	-	808,148
Profit for the period	-	-	-	-	-	-	7,135,716	7,135,716
Dividends paid	-	-	-	-	-	-	(3,237,691)	(3,237,691)
At 1st June 2008	253,605	1,357,283	(2,811,878)	450,747	3,468,673	14,172	7,038,774	9,771,376
Share option exercise	6,211	161,158	177,946	-	-	-	-	345,315
Decrease in fair value*	-	-	-	(446,414)	-	-	-	(446,414)
Released on disposal*	-	-	-	(672)	-	-	-	(672)
Share based payment	-	-	-	-	7,113	-	81,136	88,249
Deferred tax	-	-	-	-	(1,708,056)	-	(7,663)	(1,715,719)
Current tax on share options	-	-	-	-	-	-	1,270,841	1,270,841
Profit for the period	-	-	-	-	-	-	3,846,783	3,846,783
Dividends paid	-	-	-	-	-	-	(4,418,079)	(4,418,079)
At 31st May 2009	259,816	1,518,441	(2,633,932)	3,661	1,767,730	14,172	7,811,792	8,741,680

* Net of deferred tax

Consolidated cash flow statement

For the year ended 31st May 2009

	Note	2009 £	2008 £
Cash flow from operating activities
Operating profit		5,683,399	9,825,970
Adjustments for:
Depreciation charges		288,918	158,474
Share based payment charge		88,249	141,083
Translation adjustments on investments		(372,759)	50,223
Loss on disposal of fixed assets		5,418	-
Cash generated from operations before changes in working capital		5,693,225	10,175,750
Decrease/(increase) in trade and other receivables		704,816	(960,002)
(Decrease)/increase in trade and other payables		(719,487)	906,653
Cash generated from operations		5,678,554	10,122,401
Interest received		145,604	438,109
Interest paid		-	(1,691)
Taxation paid		(2,476,595)	(3,161,783)
Net cash generated from operating activities		3,347,563	7,397,036
Cash flow from investing activities
Purchase of property and equipment		(799,943)	(261,852)
Proceeds from sale of property and equipment		793	-
Purchase of non-current financial assets		(663)	-
Proceeds from sale of non-current financial assets		663	14,424
Purchase of current financial assets		-	(1,208,121)
Proceeds from sale of current financial assets		744,207	1,961,075
Net cash (used)/generated from investing activities		(54,943)	505,526
Cash flow from financing activities
Proceeds from issue of ordinary shares		167,369	-
Ordinary dividends paid	6	(4,418,079)	(3,237,691)
Purchase and cancellation of own shares		-	(4,544,432)
Purchase of own shares by employee share option trust		-	(1,590,642)
Proceeds from sale of own shares by employee  share option trust		177,946	352,289
Net cash used in financing activities		(4,072,764)	(9,020,476)
Net decrease in cash and cash equivalents		(780,144)	(1,117,914)
Cash and cash equivalents at start of period		5,498,910	6,616,824
Cash and cash equivalents at end of period		4,718,766	5,498,910

  Notes

For the year ended 31st May 2009

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 next two weeks.  The information shown for the years ended 31st May 2009 and 31st May 2008 does not constitute statutory accounts and has been extracted from the full accounts for the years ended 31st May 2009 and 31st May 2008. 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 31st May 2008 have been filed with the Registrar of Companies. The accounts for the year ended 31st May 2009 will be delivered to the Registrar of Companies in due course.

1. Basis of accounting

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

(a) New IFRS Standards and Interpretations

At the date of authorisation of these financial statements, the following Standards and Interpretations, which are relevant to the Group, were in issue but not yet effective:

IAS 1 (revised) Presentation of financial statements - comprehensive revision including the requirement to extract 'non-owner changes in equity' from the statement of changes in shareholders' equity and present in a new 'statement of comprehensive income'.

IFRS 2 Share-based payment - amendments clarify that vesting conditions comprise only service conditions and performance conditions, and specifies the accounting treatment for a failure to meet a non-vesting condition.

IFRS 7 Financial instruments disclosures - amendment relating to the reclassification of financial assets.

IFRS 8 Operating segments - introduces the 'management approach' to segmental reporting whereby information is to be disclosed on the same basis as that used for internal reporting purposes.

There are a number of other Standards and Interpretations, and revisions to existing Standards and Interpretations, including the improvements project, in issue but not in force at 31st May 2009. These are not considered relevant to the Group's financial statements.

The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the results or the financial statements of the Group.

(b) Basis of consolidation and preparation

These financial statements consolidate the financial statements of the Company and all of its subsidiary undertakings. The Company's principal subsidiaries are City of London Investment Management Company Limited and City of London US Services Limited, all other subsidiaries being dormant at 31st May 2009.

The Company is domiciled in the UK and its shares are issued in sterling. The functional currency of the business is however US Dollars. Management have decided that the presentational currency of the financial statements should be sterling rather than the functional currency due to the Company being a UK registered entity.

The consolidated financial statements are prepared on the historical cost basis except for the revaluation of certain financial instruments as outlined in point (c) (ii) below.

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 areas of the financial statements that are subject to the use of estimates and assumptions are noted below:

Income taxes

Significant judgement is required in determining provisions for income taxes and in determining deferred tax assets.

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.

The principal accounting polices adopted are set out below and have, unless otherwise stated, been applied consistently to all periods presented in these accounts.

(c) Significant accounting policies

(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) Financial instruments

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

Loans and receivables

Held-to-maturity investments

Available-for-sale financial assets

A financial asset or liability at fair value through profit or loss

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 being recognised in equity. 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 gain 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 directly in equity are recycled into the income statement as part of this calculation of the gain 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 equity and recognised in the income statement.

The Group's investments in derivatives are designated as financial assets at fair value through profit and loss. Such investments are accounted for in the same way as available-for-sale assets but any gains or losses arising from changes in fair value are recognised in the income statement. The fair value of the derivatives held by the Group is determined as follows:

Options - priced using the quoted market bid price

Forward currency trades - priced using prevailing exchange rates

The only exception is where the Group holds an investment in options on unquoted equity instruments, whose fair value cannot be reliably measured.  Such investments are measured at cost less impairment.

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

The Group's investments are reported in the balance sheet as follows:

	2009	2008
	£	£
Non-current assets
Other financial assets:
Investment in funds	11,107	14,129
Investment in unquoted options	46,428	37,919
	57,535	52,048
Current assets
Available-for-sale financial assets: investment in funds	431,365	1,861,375
Other financial assets: investment in quoted options	-	30,335

Where the Group has invested in Delaware Statutory Trust funds there is a requirement to nominate a tax partner and as Investment Manager, the Group has adopted this role which requires that a nominal investment be held in each fund for the life of the fund.  Therefore, such nominal investments are reported as other financial assets under non-current assets. 

Where the Group has used its own cash to seed new funds, the investment is generally held until the fund's performance is established. Such investments are reported as available-for-sale financial assets under current assets. 

(iii) Trade receivables 

Trade receivables are measured at 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. 

(iv) Cash and cash equivalents 

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

(v) Trade payables 

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

(vi) Deferred taxation

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the 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 each balance sheet date 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 to equity, in which case the deferred tax is also dealt with in equity.  Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

(vii) Share-based payments

The Company operates an Employee Share Option Plan.  In accordance with IFRS 2, 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.

In accordance with the transitional provisions, IFRS 2 has been applied only to grants of share options after 7th November 2002 that had not vested as at 1st June 2006.

(viii) Revenue

Revenue arises in North America, Europe and Australia and comprises investment management fees earned.  Fees are recognised in revenue as the investment management services are provided, in accordance with the underlying agreements.

(ix) Foreign currency translation

Foreign currency transactions are translated using the exchange rates prevailing at the transaction date.  Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of period-end monetary assets and liabilities are recognised in the income statement.

The functional currency of the Group and its 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 from 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 are sold to the Company and therefore it is the only entity with any exchange differences. 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 equity and the income statement.

(x) Leases

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

(xi) 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 accrue.

2. Operating profit

The operating profit is arrived at after charging:	2009 £	2008 £
Depreciation of owned assets	288,918	158,474
Auditors' remuneration:
- Statutory audit	45,271	45,000
- Taxation services	23,629	18,018
- Other services	23,852	15,228
Operating lease rentals:
- Land and buildings	363,746	231,075
- Other	16,914	9,258
Operating sublease rentals:
- Land and buildings	6,091	8,919
Foreign exchange losses/(gains)	94,256	(94,753)

3. Interest receivable and similar income

	2009 £	2008 £
Interest on bank deposit	145,604	436,418
(Loss)/gain on sale of investments	(214,981)	426,220
Fair value of investments	9,200	6,232
	(60,177)	868,870

4. Tax charge on profit on ordinary activities

(a) Analysis of tax charge on ordinary activities:

	2009 £	2008 £
Tax at 28% (2008 - 30%) based on the profit for the year	1,634,820	3,255,640
Double taxation relief	(422,174)	(637,640)
Deferred tax	(113,251)	(42,324)
Adjustments in respect of prior years	(39,037)	(9,882)
	1,060,358	2,565,794
Foreign tax for the current period	610,544	950,355
Adjustments in respect of prior years	(133,253)	42,975
	477,291	993,330
	1,537,649	3,559,124

(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: 28% (prior year: 30%). The differences are explained below:

	2009 £	2008 £
Profit on ordinary activities before tax	5,384,432	10,694,840
Tax at 28% (2008 - 30%) thereon	(1,507,641)	(3,208,452)
Effects of:
Expenses not deductible for tax purposes	(35,685)	(20,122)
Capital allowances less than depreciation	(15,706)	(10,519)
Unrelieved overseas tax	(188,370)	(312,715)
Impairment in seed investments not tax deductible	(66,861)	-
Deferred tax on share based-payments and impairment	113,251	42,324
Prior period adjustments	172,290	(33,093)
Other	(8,927)	(16,547)
	(1,537,649)	(3,559,124)

5. Earnings per share

The calculation of earnings per share is based on the profit for the period of £3,846,783 (2008 - £7,135,716) divided by the weighted average number of ordinary shares in issue for the year ended 31st May 2009 of 23,844,801 (2008 - 24,338,540).

As set out in Note 8 the Employee Benefit Trust held 1,617,650 ordinary shares in the Company as at 31st May 2009. 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 for the year of £3,846,783 (2008 - £7,135,716) divided by the diluted weighted average of ordinary shares for the year ended 31st May 2009 of 25,587,418 (2008 - 27,404,870).

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

	2009  Number of shares	2008  Number of shares
Weighted average number of shares - basic earnings per share	23,844,801	24,338,540
Effect of dilutive potential shares - share options	1,742,618	3,066,330
Weighted average number of shares - diluted earnings per share	25,587,419	27,404,870

6. Dividend

	2009 £	2008 £
Dividends paid:
Interim dividend of 5p per share (2008 - 6p)	1,197,492	1,509,883
Final dividend in respect of year ended:
31st May 2008 of 13.5p per share (2007 - 7p)	3,220,587	1,727,808
	4,418,079	3,237,691

A final dividend of 10p per share has been proposed, payable on 20th November 2009, subject to shareholder approval, to shareholders who are on the register of members on 30th October 2009.

7. Share capital

Group	2009 £	2008 £
Authorised
90,000,000 Ordinary shares of 1p each (2008 - 1p each)	900,000	900,000

Group	2009 £	2008 £
Allotted, called up and fully paid
At start of year 25,360,500 (2008 - 26,777,800) Ordinary shares of 1p each	253,605	267,777
Shares repurchased; nil (2008 - 1,417,300)	-	(14,172)
Dilutive share options exercised; 621,103 (2008 - nil)	6,211	-
At end of year 25,981,603 (2008 - 25,360,500) Ordinary shares of 1p each	259,816	253,605

8. Investment in own shares

Investment in own shares relates to City of London Investment Group Plc shares held by an Employee Benefit Trust on behalf of City of London Investment Group Plc.

At 31st May 2009 the Trust held 1,617,650 Ordinary 1p shares (2008 - 2,013,085), of which 1,262,375 Ordinary 1p shares (2008 - 1,458,310) were subject to options in issue.

 

END

 

 

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