Final Results

RNS Number : 6698N

City of London Investment Group PLC

06 September 2011

 



6^th September 2011

CITY OF LONDON INVESTMENT GROUP PLC

("City of London" or "the Group")

FINAL RESULTS FOR THE YEAR TO 31^st MAY 2011

City of London (LSE: CLIG) announces full year results for the year to 31^st May 2011.

SUMMARY
•	Funds under management (FuM) at 31st May 2011 increased by 33% in US$ terms to US$5.82 billion (2010: US$4.38 billion) and by 18% in sterling terms to £3.54 billion (2010: £3.01 billion).  The rise in the MSCI Emerging Markets Index (MXEF) was 29%
•	FuM at the end of August 2011 were US$5.22 billion, a fall of 10.3% since the financial year end.  This compares to a fall of 10.6% in MXEF over the same period
•	Profit before tax was up 27% to £13.1 million (2010: £10.4 million) with basic earnings per share up 23% to 35.1p (2010: 28.5p)
•	Recommended final dividend of 16p per share (2010: 15p), payable on 21st October 2011, subject to shareholder approval, to shareholders on the register on 7th October 2011, making a total for the year of 24p (2010: 22p)
•	Listed on the main market of the London Stock Exchange on 29th October 2010

Andrew Davison, Chairman, said, "Despite the volatility in the markets in which we operate, we are confident that our investment process can continue to produce good returns for our clients and shareholders."

Barry Olliff, CEO, added, "Recent market volatility has seen FuM at US$4.97bn at the low on 9^th August (MXEF: 968), recovering to US$5.22bn at 31^st August (MXEF: 1033).  This has presented us with opportunities to significantly benefit in terms of our investment performance. "

For further information, please visit www.citlon.co.uk or contact:

Doug Allison (Finance Director)	Simon Hudson / Andrew Dunn / Sonya Williams
City of London Investment Group Plc	Tavistock Communications
Tel: [phone]	Tel: [phone]
Jeff Keating	Simon Bridges
Singer Capital Markets Limited	Canaccord Genuity Limited
Financial Adviser & Joint Broker	Joint Broker
Tel: [phone]	Tel: [phone]

Chairman's statement

For the second year in a row, our principal investment markets (as measured by the MSCI Emerging Markets Index, MXEF) grew by in excess of 20%.  Funds under management (FuM) were US$5.82 billion (£3.54 billion) at 31st May 2011 (2010: US$4.38 billion or £3.01 billion), representing a 33% increase in US$ terms and an 18% increase in sterling terms.  This reflects new client monies as well as outperformance over and above MXEF, which increased by 29% over the same period (31^st May 2010 to 31^st May 2011).

As anticipated by our investment management team, emerging markets since our year end have essentially tracked down as investors, domestic and international, have settled for the (almost) risk-free returns available on cash as a result of a series of rate rises in the principal emerging markets.  As at 31^st August 2011, MXEF has fallen 10.6% since our year end.  FuM were US$5.22 billion at 31^st August 2011, a fall of 10.3% over the figure at 31^st May 2011.

Results

Revenue for the year to 31^st May 2011 (being the fees derived from the Group's management charges on FuM) increased by 22% to £36.5 million (2010: £30.0 million).  Profit before tax increased by 27% to £13.1 million (2010: £10.4 million) net of a one-off charge of £0.4 million relating to the costs of our upgrade to the main market of the London Stock Exchange (2010: nil).  Basic profit per share, after a tax charge of £4.4 million, representing 33% of pre-tax profits (2010: £3.4 million, representing 33% of pre-tax profits), increased by 23% to 35.1p (2010: 28.5p).  Fully diluted profit per share increased by 26% to 34.0p (2010: 26.9p).  Cash and cash equivalents at the year-end were £6.1 million (2010: £4.8 million).

Dividends

In line with the Group's policy of paying dividends that are approximately 1.5 times covered by profit per share, the Board is recommending a final dividend for the year to 31^st May 2011 of 16p per share (2010: 15p) to be paid some four weeks earlier than last year on 21^st October 2011 to shareholders on the register on 7^th October 2011.  This would bring the total for the year, including the interim dividend of 8p paid on 28th February 2011 (2010: 7p), to 24p (2010: 22p), representing an increase of 9%.  The level of payout this year is covered 1.46 times by basic profit per share compared to 1.30 times last year.

Upgrade to the Main Market

At the end of October 2010, the Company's ordinary shares were delisted from AIM, where they had traded for four and a half years, and admitted to the Official List of the UK Listing Authority and the London Stock Exchange's main market.  The Board believed that this natural progression would result in a wider potential investor universe for City of London Investment Group shares.  This has proved to be the case in the 10 months since, both for individual investors (who can now hold our shares in ISAs) and for institutional investors (a number of whom are unable to invest in AIM listed entities).

Diversification

We are seeing significant progress in two of our diversification products.  The first is Natural Resources where the Group has recently won a number of mandates to be funded over the next few months.  The second is developed market closed-end funds where we have recently won a significant mandate which we hope will be the first of many, based upon the consistent outperformance demonstrated by this product.  In both cases there is significant consultant interest in the products.  From 1st June 2011, the Group has employed two additional marketers, bringing the total team to three people.  Our aim is to secure new monies which for the most part earn significantly higher margins for the Group because they do not attract the marketing commission charged by the Group's former third party marketing agency.  We hope to see further increases in the net margins earned by the Group as the expanded internal marketing team gains traction and we focus increasingly on the diversification products.

Board and management

Post our year end, on 3rd June 2011, the Group announced the appointment of an additional non-executive Director, Rian Dartnell.  Rian is a US citizen and resident and is Chief Investment Officer for Granite Associates, responsible for setting and implementing the firm's investment strategy and for managing the investment team.  He joined Granite Associates in 2001, prior to which he held a number of senior international investment management appointments, latterly with Global Asset Management.  Rian knows both our investment and client markets well and I am sure that his experience and knowledge will benefit the Board's decisions.  I welcome him to the Group.

The Board has carefully considered the important matter of Barry Olliff's succession.  He has the roles of both Chief Executive Officer (CEO) and Chief Investment Officer (CIO), and he has already told shareholders that he wishes to be able to retire in 2015 - his well publicised share sale programme is a preparation for this event.  He now holds 13.5% of the shares.  Working closely with Barry the Board decided that Doug Allison, who is currently Chief Financial Officer (CFO) and has been with the company 14 years, will make an excellent successor CEO and intend to make this appointment in 2013.  The Board is also discussing with Barry the best way to ensure that his role as CIO is passed on so as to ensure the continuation of the Group's successful investment performance.     

Staff

During the year, great demands have been made on the staff in all areas of the Group, reflecting the challenging markets in which we trade and the need to be properly equipped to maintain the highest standards of professionalism.  I heartily thank them all for their hard work, initiative and loyalty.

Outlook

This year has already felt the effects of the economic turbulence resulting from the difficulties of Governments to manage their economies satisfactorily.  We believe that our core products, together with our newer strategies, will place us in a relatively good position to confront the future uncertainties.  Despite the volatility in the markets in which we operate, we are confident that our investment process can continue to produce good returns for our clients and shareholders.

I will update shareholders on progress at the time of the AGM, which will be held on 3^rd October 2011.

Andrew Davison

Chairman

1^st September 2011

Chief Executive Officer's review

Looking back at our financial year to the end of May 2011 it seems to have been in two halves.  During the first half, MXEF which, as we have said before, is a good proxy for measuring both what we do and also for our investment performance, appreciated 25%.

In the second half of our financial year, while demonstrating a little volatility, it was relatively unchanged.

It was this period of sideways-moving markets that has led to some widening of the Discounts to NAV in several of the Closed-End Funds (CEFs) in which we invest.

This has happened under similar circumstances in the past.  Whilst this has impacted investment performance, it has also been seen by a few of our clients as an opportunity to add further assets.

Going back through many cycles, the CEF industry seems to take advantage of significant issuance opportunities when relevant markets are doing well.  We have watched this time and time again.  Retail seems to support markets that are appreciating, encouraging brokers and investment banks (who as we say, have very active minds!) to grow our industry via rights issues and new issuance of additional CEF products.  While this is good for us in the long term as a result of providing additional investment opportunities, sometimes it can lead to an overhang.

When markets disappoint, and the Emerging markets have now been trending sideways for nearly a year and discounts become wide, we expect the reverse to occur - that is, we expect corporate actions to reduce the supply of CEF shares.  In our view responsibility for this lies with the CEF Directors because it is unlikely that a CEF Manager will volunteer to have his fees reduced via some type of corporate action such as a buy back, a tender offer or an in specie distribution.

Bigger is better, seems to be the motto.  But smaller?  Only if Shareholders insist!  That this has been going on for over 100 years is not in doubt.  You just have to read the history of the CEF sector to see that.

What we are referencing however are the relevant events over the past twenty years since we started our business.

In this regard the first really relevant corporate governance document that we produced was in 1999, our "Statement on Corporate Governance and Voting Intentions for Closed-End Funds."  This was sent to all of our clients and relevant Directors of the CEFs in which we invested at that time.  Subsequently we have regularly updated this document, with the last version, dated 2011, having just been sent to our clients, consultants and relevant CEF Directors.  It is also available on our web site at www.citlon.co.uk.

As Corporate Governance is such a topical subject at present, I thought it would be good to go through some of our core values in this regard which, as a result of us being CEF specialists, are in some instances a little nuanced.

First, an observation: it's extraordinary the extent to which the UK and the US are so different in terms of the CEF regulatory environment in which we work.

Regarding "Control" as an example.  In the UK, if a corporation owns 30% of a company, that corporation will have to make a bid.  In the US, control is not rules-based, but there are some principles that suggest that ownership above 40% could be assumed to imply "Control".  An additional subtlety is that at 40% you would not have to make a bid, rather you might be responsible for "Short Swing Profits" which in the event that it was proven would mean that you would make a payment (a disgorgement of your profits) to the relevant CEF.

In other areas too, London is simpler.  In the UK we know what 3% and 5% ownership represents, but what about 13D's, 13G's and 13F's?  These are all relevant parts of the US Securities Exchange Act of 1934 as amended, but obtaining a clear definition from a US lawyer of some of the more subtle differences can be difficult.

Voting is different as well.  In London City of London Investment Management (CLIM) can vote "For" or "Against" a Director.  That's easy, and in the event that a Director of a fund in which we are invested does not meet our criteria (please see our list below) then we will vote against him or her.  In the US it is much more opaque; we can either vote "For" or "Withhold."  The "Withhold" vote does absolutely nothing in terms of airing a grievance and inevitably there will be enough votes cast "For" to ensure that the relevant Director is appointed.

How do we measure a "good" Investment Trust Board?  In our opinion it:

•	Is able to demonstrate real independence
•	Is correctly remunerated
•	Is resourced properly
•	Is available
•	Has Directors who sit on no more than four Boards
•	Understands the investment management industry
•	Has at least one Director who understands the Investment Trust industry
•	Is aware of issues surrounding the Discount to NAV at which Investment Trusts trade
•	Holds the investment manager accountable and thus understands the investment process employed
•	Understands risk management and sees the investment returns achieved within that context
•	Views the Fund as a consumer product and understands the Fund's peer group
•	Is regularly externally evaluated

In some cases, where a company has an entire suite of CEFs, you'll find Directors collecting in excess of US$250,000 in fees on an annual basis, and serving on more than 30 Boards!  In the table below, we've listed several such Directors (names omitted) who serve on the Boards of some of the funds in which we invest on behalf of our clients:

Date of appointment	Board seats within the combine	Fees (US$)
2005	141	579,062
1996	133	508,000
2003	133	484,000
1994	133	468,000
1994	105	290,000
1991	104	400,000
1991	104	260,000
2006	38	511,000
2008	31	355,000
1998	23	189,000

It should be noted that apart from serving on many Boards and receiving significant fees, some of these Directors have been in place for around 20 years!

Which brings me back to the topic of independence.

In the UK, independence has a relevant definition.  In addition, we are able to work within the UK Corporate Governance Code and the AIB Guidelines with the result that it is possible to understand from a practical standpoint how we should vote.  Sometimes we look to a higher standard, one that is more relevant to CEFs, but the bottom line is that our vote counts and there have been a few recent examples of where we have actually made a difference.

In the US, all of the above - the large number of Directorships, the high fees, the excessive length of service - is legal and is also considered ethical.  All of the Directors referenced in the table above are regarded as Independent!

We have tried very hard to make the point that having in excess of three or four Directorships must be very time consuming.  Possibly four within a combine could be contemplated, but this is where the difference between the UK and the US becomes even more pronounced.

First in the US, Board meetings are often batched.  What this means is that in some cases every 15 or 20 minutes a different CEF's Board Paper is reviewed. The Board then moves on.

Further, and bearing in mind that these Funds are fighting for recognition in a crowded financial service marketplace, in many instances investment matters are discussed over dinner the previous night and investment matters hardly factor in the actual Board Meeting at all!

An additional issue is that in just about every US Board meeting that we hear about, lawyers are effectively in "the Chair".

The business of the Board meeting seems to be largely about legal issues and the real business of the company, which in our opinion should be about investing, benchmarks, volatility and risk is forgotten.  Whether the Manager is actually doing a good job is often discussed over dinner.

Put around the other way, surely, if anything illegal was occurring this could be ascertained via a box-ticking exercise with a relevant sign off, and the real reason for holding the Board Meeting in the first place (an agenda based upon investment issues) could then occur.

The trouble with the US system as it relates to CEFs is that Boards, while considering themselves independent, are not and, more importantly, as we are unable to vote "Against", it means that they are invariably reappointed.

There is however one remedy open to US CEF shareholders and that is the ability to propose termination of the investment management contract, which is one of the subtleties of the 1934 Act.  In the event of a successful vote, it would require the Directors to find another Manager and, after a few attempts at this, the likely outcome would be either liquidation or some type of reduction in size that would get rid of the shareholder promoting the termination.

The trouble with the solution referenced above is that in the US, the checks and balances that can be demonstrated by a sensibly constructed Board cannot occur.

First we do not get an opportunity to place a relevant vote.  Next, they the Board spend a very short time actually asking the right questions as they are limited regarding time.  Also, having responsibility for many CEF's does not help from another perspective.  They have little time to listen and learn.  You would say that they should at the very least be expert in their knowledge of the CEF industry; we would suggest that they are neither resourced adequately nor able to demonstrate control over their brief.  In reality we would also suggest that they are, on a Fund by Fund basis, underpaid. From the table above it can be seen that the average of the averages per fund is around US$5,700.  This is a small price to pay for the responsibilities of a CEF Director and we would suggest that it should at least be four or five times that amount but we would also suggest that boards be reduced to say five, that they take on the responsibilities of a conventional US Director directing a corporation, that they oversee the Manager and that they familiarise themselves with the industry in which they work, that they concern themselves with the competitiveness of the product that they have responsibility for…..and yes, that they should give up those dinners!

Over the past few years the standards of corporate governance demonstrated by the average UK CEF (I should say an Investment Trust) Director has improved significantly.  It seems to be accepted that having a "good" Board actually assists in marketing, in potentially growing the relevant fund (or at the very least not overseeing shrinkage), and assisting with regard to oversight of the Discounts to NAV at which so many of these funds trade.

In no way am I suggesting that the UK is all good and the US is all bad.  What I would say is that at present it could be said that based on a level playing field from a tax perspective etc. the opportunity to invest or raise money knowing the above should favour the UK Investment Trust industry.

As a shareholder you will be aware of the fact that around 95% of our profits come from our Closed-End Fund business.  You will also be aware that we are an institutional firm and that our 300 institutional clients make up 99% of our assets.  You will also be aware of our wish to diversify our business.

Separate from our view regarding Closed-End Funds which have been referenced in some detail above, we have been attempting to develop our business into other areas away from the Emerging Markets Closed-End Fund industry for some time.  Having originally been a single product company focused on CEFs and having recently ended a third party relationship (North Bridge Capital are also mentioned by Doug Allison, our Finance Director, below), the marketing process has to be developed one step at a time, as I referenced last year.  As you are aware we now have a number of new products.

Obviously having new products is only half of the story.  They also need to be performing well.  In addition, we need marketing and we have recently taken on two additional experienced marketers.  One to complement our existing marketer in the US and the other to develop our marketing presence ex-US.  As of the time of writing our diversification products represented US$143m of the total AUM of US$5.22bn that we manage.  We are anticipating significant progress this year in terms of the development of our diversification products.

Regarding the past year we have begun to benefit from the run off in the North Bridge Capital contract.  Doug Allison has referenced this in the Financial review.  As shareholders will be aware over the next few years this should have a significant effect on our margin.

Recent market volatility has seen FuM at US$4.97bn at the low on 9^th August (MXEF: 968), recovering to US$5.22bn at 31^st August (MXEF: 1033).  This has presented us with opportunities to significantly benefit in terms of our investment performance.

Cash, a defensive country allocation and discount volatility have all played their part recently in allowing us to create significant alpha. 

In an attempt to provide shareholders with more up to date information regarding FUM flows, reviewing the month to 31^st August, we have received three redemption requests totalling US$10m and have received commitments of just over US$44m in additional funds. Our clients have remained very sticky.

As a result of Board deliberations, in 2013 Doug Allison will become CEO.  As with many things at City of London this plan has been in place for some time, and the transition is expected to be seamless.  I would intend to retain my responsibilities as CIO for at least another four years, during which time our objective will be to achieve an equally seamless transition of the CIO role, thereby enabling me to consider retirement.

Regarding my CLIG shareholding, currently 3,632,580 shares, or 13.5%, I intend to continue with my long term plan to reduce my holding at pre-defined price intervals.  As part of my tax planning I have made a commitment to pass an additional 1,000,000 shares to the Newlin Foundation, which currently holds 472,207 shares.  The Foundation and I will each make available for sale 250,000 shares at £4.50, and the same number again at each of £5.00, £5.50 and £6.00.

I would like to thank all staff for your ongoing contribution to the success of the business, and for your loyalty, which has in many instances been demonstrated over an extended period of time.

Barry Olliff,

Chief Executive Officer

1^st September 2011

Business review

Institutional investor demand for emerging market equities continued over the period, helping us raise almost US$300 million in new assets under management, all in the context of managing a restricted pipeline of new opportunities.  The focus of business development continues to be on building awareness of our equity and developed closed-end fund strategies.

To this end, two new marketers were hired and joined the firm on 1^st June, one in the US, the other in Europe, to raise the profile of our investment strategies with consultants and institutional plan sponsors.

In the US, we now have two marketing professionals covering the substantial institutional marketplace which we expect should result in heightened awareness of our strategies.  Likewise, the addition of a dedicated marketer in Europe will allow us to begin to raise the firm's profile among European institutions.

We have adopted a deliberate approach in our marketing that focuses on investment performance, which then makes it possible to establish long-term relationships with the most sophisticated consultants.  Over time, this has proven to be an excellent means of attracting and retaining client assets resulting in significantly higher fee margins and longer client retention.

Products

We are pleased to report that US$10 million in new monies were awarded to the Natural Resource strategy in the second quarter of 2011, which at the end of the period was US$87.3 million in size.  In addition to segregated mandate capabilities, we have both a US fund and a Dublin UCITS that provide Natural Resource strategies.

As this Natural Resource strategy clears the US$100 million threshold it should become eligible for inclusion in more consultant searches.  As part of the due diligence process undertaken by many consultants, the asset threshold is always the most difficult to overcome when launching a new strategy.  Nonetheless, good progress has been made and with continued interest in the commodity and natural resource space we hope to make further inroads.

In January 2011 we launched a new strategy in Asia, ex Japan, small capitalisation stocks, which will supplement our global emerging markets equity strategy launched in August 2009.  We intend to support and grow our equity product offerings as opportunities present themselves.

Also of note over the period was the recent mandate win of US$50 million, by our Developed closed-end fund strategy (from an existing client of the firm).  This is a key win for the strategy and will certainly assist in building momentum.  Our initial feedback from select clients has been positive with many appreciating that we are using a dedicated team with the same process of buying and selling closed-end funds for global stocks as we employ in emerging markets.  A fund for US institutions was launched during the period and was seeded by the firm to begin the track record.

An adjunct of our emerging markets expertise via closed-end funds has been our Frontier strategy, which has an investment record dating back to 2005 and is now beginning to attract institutional interest in the form of educational visits from the investment team.

Performance

Global composite investment returns for the emerging market closed-end fund strategy for the rolling one year ending 31^st May 2011 were 30.2% vs 29.2% for MXEF in USD (14.9% vs 14% in GBP).  Market volatility contributed to widening discounts to net asset value across the closed-end fund universe as debt problems in Europe and the US stoked risk aversion in the emerging markets.

Widening discounts signal value in the closed-end fund universe and our investment team has been taking advantage of opportunities to invest in attractively priced funds during this period.

Outlook

Marketing efforts in the new fiscal year will be targeted at investment consultants, foundations, endowments and family offices in the US, Europe and Asia.  Our growing equity and developed closed-end fund capability will be the focus of our product diversification and business development activities.

Carlos Yuste

Business Development Director

1^st September 2011

Financial review

Consolidated income statement

The Group effectively has a single source of income - fees charged for the management of client accounts - this year totalling £36.5 million (2010: £30.0 million).  The fee applied to any given account depends upon the particular mandate and on the size of the investment.  For many of our accounts, 20% of the fee we earn is passed on to third party marketers, principally North Bridge Capital, under the terms of a contract which expired in October 2010, and for some of the commingled accounts the Group is responsible for the custody and administration costs. 

The commission paid to third parties this year was £5.8 million (2010: £4.8 million) and the custody and administration fees were £1.2 million (2010: £1.1 million).  While these charges are presented in the income statement as administrative expenses, it is perhaps easier to think in terms of net fees (that include these charges), which during the year under review were £29.5 million (2020: £24.1 million), and which have represented over the last two years a fairly constant 85 basis points in weighted average terms across the range of accounts managed by the Group.

Having noted that the North Bridge contract has now expired, it is appropriate to expand a little as to the implications of this event for future years' results.  The agreement with North Bridge was for a ten year "trail", meaning that their commission on any account runs for ten years from the point of initial investment, with the basis of their fee mirroring ours, i.e. net asset value as measured monthly or quarterly.  As at the year end, the North Bridge commission is payable with respect to $4.6 billion of the $5.8 billion under management. 

The original contract with North Bridge dates back to 1994, and there are a number of accounts won in the period 1994 to 1997 which have over recent years come through the ten year trail period.  From 1998 to 2002 the Group was not active in raising new money, having closed the funds to new investors in 1997, so further run offs of the ten year trail will not occur until our financial year 2012-3, from which point the payments decline steadily through to 2020-21, the last year in which the commission will be payable (always assuming that the relevant accounts are still in place at that time). 

It is also worth making the point that to the extent that from time to time there may be redemptions against accounts which attract the commission, and there may be opportunities to replace these assets with new mandates, it would seem likely that there could be some uplift in the net fee rate.  To some extent we can see this effect coming through at the end of the year, with the margin increasing just slightly to 86 basis points as the year drew to a close.

The following table illustrates the projected run off of the North Bridge commission assuming 1) constant market values, 2) constant US$/£ exchange rate, and 3) all relevant accounts remain invested through to their tenth anniversary:

Northbridge Capital commission run-off

(based on FuM at 31^st July 2011)

Financial year	£m (atUS$1.60/£1)
2011-2012	5.8
2012-2013	5.8
2013-2014	5.5
2014-2015	4.8
2015-2016	3.6
2016-2017	3.0
2017-2018	2.4
2018-2019	1.3
2019-2020	0.3
2020-2021	0.1

Aside from fee income, the Group has interest income and, from time to time, investment income.  For the current year, interest income rounds to zero (2010: £0.1 million), while investment income of £0.2 million (2010: £ nil) relates in the main to a gain realised on the reduction of one of the Group's seed investments during the year.

After separating out third party commissions and custody and administration costs, the administrative expenses which form "overheads" for the year totalled £10.1 million (2010: £8.9 million).  Of this, 59% (2010: 56%) was human resources costs - salaries, in the main.  With the US$/£ rate averaging 1.59 this year, exactly as it did in the previous year, the increase was attributable to an increase in headcount from 64 to 73, plus a small general increase in salaries.  The cost-income ratio using this definition of costs, and taking fee income net of the commissions and net of custody and administration, was 34%, a further improvement on last year's 37% as would be expected based upon the growth in funds under management.

Operating profit before profit-share was £19.7 million (2010: £15.2 million), which net of the 30% profit-share (plus associated taxes of £0.5 million, 2010: £0.3 million) and the £0.4 million cost of the main market listing gave a pre-tax profit of £13.1 million (2010: £10.4 million).  Taxes this year amount to 33.3% of profit (2010: 32.7%), resulting in profit after tax of £8.8 million, an increase of 25.6% against the prior year's £7.0 million.

Consolidated statement of financial position and statement of changes in equity

At the beginning of the period, the Group's net assets were £10.6 million.  Profit after tax was £8.8 million, and dividends of £5.8 million were paid in the year, being the prior year's final dividend of 15p per share (2008/9: 10p) and the current year's interim dividend of 8p per share (2009/10: 7p).  An unrealised profit of £0.4m (2010: £0.3m) arose in respect of the Group's investments in its own funds.  The exercise of share options during the year directly contributed £0.8m to the increase in equity (2010: £0.4 million), whilst indirectly generating a further £1.1 million in the form of a reduced tax charge (2010: £0.3 million).

As in previous years, the Group sought to apply surplus cash opportunistically to add to the ESOP trust's shareholding, buying 365,000 shares for a total investment of £1.5 million (2010: 243,350 shares for £0.7 million).  At the year end the ESOP trust held 1,632,167 shares, of which 1,421,292 shares were subject to options issued to Directors and staff (2010: 1,589,158 of which 1,427,533 were under option).  The loan by the Group to the trust stood at £4.2 million (2010: £3.1 million), while the value of the trust's shareholding, using the lower of exercise prices and closing list price, was £4.9 million (2010: £3.6 million).  Separate from the options issued against trust held shares, there were also 556,800 dilutive share options in issue at the year end (2010: 1,446,447).

"Available-for-sale financial assets" is a less than perfect description for investments which the Group has made in a range of funds in support of our diversification strategy.  At the close of the year there were five such "seed investments", with a total net asset value of £5.8 million (2010: £3.6 million), reflecting an unrealised gain of £0.7 million (2010: £0.3 million) which forms the revaluation reserve.

Debtors (principally accrued fees receivable) and creditors (principally accrued fees payable plus profit-share) offset each other to a significant degree, as tends to be the case, and thus the only remaining substantial figure in the statement of financial position is cash, £6.1 million compared to the opening position of £4.8 million.

Consolidated cash flow statement

As ever, operating cash flow is not materially different to pre-tax profit - unsurprising given that there are few extended time lags inherent in the business that would affect the conversion of profit to cash.  Cash generated from operating activities, net of taxation, was £9.6 million (2010: £8.9 million), and the principal applications of cash have been the payment of dividends of £5.8 million (2010: £4.2 million), net additions to the seed investments of £1.7 million (2010: £2.8 million), and the purchase of shares for the ESOP, as noted above, for £1.5 million (2010: £0.7 million).

Currency exposure

This statement would not be complete without the usual commentary on currency exposure.  The key point is that while a business that earns almost all of its income in US dollars, but reports results in sterling, may superficially be assumed to be critically exposed to the US$/£ exchange rate, in reality within the context of our business it is more appropriate to "see through" the US dollar to the underlying currencies in which the Group's client accounts are invested.  The relative strength or weakness of the US$ against those (principally emerging market) currencies will feed directly through to US$ denominated funds under management and thus to fee income in US$ terms, whereas the translation into reported sterling income will be influenced by the strength or weakness of the US$ against sterling.

Notwithstanding the effects described above, and remaining conscious of the interdependency between US$ strength and the US$ net asset value of funds under management, it is appropriate to repeat in updated form the following table, which illustrates expected annualised post-tax profit outcomes given a range of combinations of funds under management and US$/£ exchange rates:

Post-Tax Profit: illustration of US$/£ rate effect

	FuM - US$bn
	5.0	5.5	6.0	6.5
US$/£	Post-Tax, £m:
1.50	8.3	9.6	11.0	12.3
1.55	7.9	9.2	10.5	11.8
1.60	7.6	8.9	10.1	11.4
1.65	7.3	8.5	9.7	11.0
1.70	7.0	8.2	9.4	10.6

Assumes:

1. Average net fee 86 bp's

2. Annual operating costs £4.5m plus US$8.5m plus SGD1.7m (£1 = SGD2.00)

3. Profit-share 30%

4. Average tax 33%

The "assumptions", which are in fact a close approximation to the Group's current operating environment, reflecting as they do the net fee margin at 86 basis points and the split of the Group's expenses between the major underlying currencies, generate the values in the table by way of straightforward calculation.  These values are not forecasts of course - because it would be a strange year in which both funds under management and exchange rates held constant throughout - but they provide a useful point of reference.  Given that the numbers are purely formulaic, it follows that it is perfectly valid to extrapolate between the numbers in the table to achieve any desired combination, and also that the annualised numbers can be time apportioned to provide an indication for periods of less than a year.

Finally, on the subject of currency exposure, we maintained the forward sales of US$ which hedge the Group's balance sheet exposure, and at 31^st May these totalled US$13.5 million, with a weighted average exchange rate of 1.5837 (2010: $6.5 million at a weighted average rate of 1.5973).

Doug Allison

Finance Director

1^st September 2011

Consolidated income statement

For the year ended 31st May 2011

		Total	Total
		2011	2010
	Note	£	£
Revenue	4,5	36,494,163	29,969,539
Administrative expenses
Staff costs		11,685,867	9,378,107
Commissions payable		5,785,441	4,768,780
Other administrative expenses		5,266,342	5,184,733
Main market listing costs		437,778	-
Depreciation and amortisation		370,902	348,196
		(23,546,330)	(19,679,816)
Operating profit	6	12,947,833	10,289,723
Interest receivable and similar gains/(losses)	7	122,322	(70,066)
Impairment of seed investments	8	79,372	159,418
Profit before taxation		13,149,527	10,379,075
Income tax expense	9	(4,380,204)	(3,396,293)
Profit for the year		8,769,323	6,982,782
Basic earnings per share	10	35.1p	28.5p
Diluted earnings per share	10	34.0p	26.9p

Consolidated statement of comprehensive income

For the year ended 31st May 2011

	2011	2010
	£	£
Profit for the year	8,769,323	6,982,782
Fair value gains/(losses) on available-for-sale investments *	461,154	266,790
Release of fair value (gains)/losses on disposal of available-for-sale investments*	(62,394)	-
Other comprehensive income	398,760	266,790
Total comprehensive income for the year attributable to equity holders of the company	9,168,083	7,249,572

* Net of deferred tax

Consolidated statement of financial position

31st May 2011

		2011	2010
	Note	£	£
Non-current assets
Property and equipment		543,748	687,657
Intangible assets		363,684	409,144
Other financial assets		73,210	76,679
Deferred tax asset		1,380,017	1,503,498
		2,360,659	2,676,978
Current assets
Trade and other receivables	14	5,576,011	4,365,999
Available-for-sale financial assets	14	5,807,787	3,595,873
Cash and cash equivalents	14	6,104,673	4,774,473
		17,488,471	12,736,345
Current liabilities
Trade and other payables	14	(4,013,419)	(3,887,781)
Current tax payable		(1,340,386)	(811,983)
Creditors, amounts falling due within one year		(5,353,805)	(4,699,764)
Net current assets		12,134,666	8,036,581
Total assets less current liabilities		14,495,325	10,713,559
Non-current liabilities
Deferred tax liability		(235,129)	(105,203)
Net assets		14,260,196	10,608,356
Capital and reserves
Called up share capital	11	268,584	259,688
Share premium account		1,975,084	1,640,667
Investment in own shares	12	(4,183,659)	(3,071,259)
Revaluation reserve		669,211	270,451
Share option reserve		1,621,936	1,721,492
Capital redemption reserve		18,562	18,562
Retained earnings		13,890,478	9,768,755
Total equity		14,260,196	10,608,356

Consolidated statement of changes in equity

31st May 2011

	Share capital	Share premium account	Investment in own shares	Revaluation reserve	Share option reserve	Capital redemption reserve	Retained earnings	Total attributable to shareholders
	£	£	£	£	£	£	£	£
At 1st June 2009	259,816	1,518,441	(2,633,932)	3,661	1,767,730	14,172	7,811,792	8,741,680
Profit for the year	-	-	-	-	-	-	6,982,782	6,982,782
Comprehensive income	-	-	-	266,790	-	-	-	266,790
Total comprehensive income	-	-	-	266,790	-	-	6,982,782	7,249,572
Transactions with owners
Share option exercise	4,262	122,226	293,512	-	(72,962)	-	72,962	420,000
Share cancellation	(4,390)	-	-	-	-	4,390	(1,165,678)	(1,165,678)
Purchase of own shares	-	-	(730,839)	-	-	-	-	(730,839)
Share-based payment	-	-	-	-	84,905	-	-	84,905
Deferred tax	-	-	-	-	(58,181)	-	(31,099)	(89,280)
Current tax on share options	-	-	-	-	-	-	280,688	280,688
Dividends paid	-	-	-	-	-	-	(4,182,692)	(4,182,692)
Total transactions with owners	(128)	122,226	(437,327)	-	(46,238)	4,390	(5,025,819)	(5,382,896)
At 1st June 2010	259,688	1,640,667	(3,071,259)	270,451	1,721,492	18,562	9,768,755	10,608,356
Profit for the year	-	-	-	-	-	-	8,769,323	8,769,323
Comprehensive income	-	-	-	398,760	-	-	-	398,760
Total comprehensive income	-	-	-	398,760	-	-	8,769,323	9,168,083
Transactions with owners
Share option exercise	8,896	334,417	414,431	-	(131,002)	-	131,002	757,744
Purchase of own shares	-	-	(1,526,831)	-	-	-	-	(1,526,831)
Share-based payment	-	-	-	-	130,241	-	-	130,241
Deferred tax	-	-	-	-	(98,795)	-	(49,575)	(148,370)
Current tax on share options	-	-	-	-	-	-	1,057,573	1,057,573
Dividends paid	-	-	-	-	-	-	(5,786,600)	(5,786,600)
Total transactions with owners	8,896	334,417	(1,112,400)	-	(99,556)	-	(4,647,600)	(5,516,243)
At 31st May 2011	268,584	1,975,084	(4,183,659)	669,211	1,621,936	18,562	13,890,478	14,260,196

Consolidated cash flow statement

For the year ended 31st May 2011

		2011	2010
	Note	£	£
Cash flow from operating activities
Operating profit		12,947,833	10,289,723
Adjustments for:
Depreciation charges		325,442	302,735
Amortisation of intangible assets		45,460	45,461
Share-based payment charge		130,241	84,905
Translation adjustments		53,320	(293,254)
(Profit)/loss on disposal of fixed assets		-	(342)
Cash generated from operations before changes in working capital		13,502,296	10,429,228
Increase in trade and other receivables		(1,210,012)	(1,497,601)
Increase in trade and other payables		125,638	1,538,447
Cash generated from operations		12,417,922	10,470,074
Interest received		28,258	66,579
Interest paid		-	-
Taxation paid		(2,819,116)	(1,681,580)
Net cash generated from operating activities		9,627,064	8,855,073
Cash flow from investing activities
Purchase of property and equipment		(181,533)	(189,407)
Proceeds from sale of property and equipment		-	910
Purchase of intangible assets		-	(454,605)
Purchase of non-current financial assets		(608)	(10,318)
Purchase of current financial assets		(2,307,698)	(3,146,241)
Proceeds from sale of current financial assets		560,204	379,853
Net cash used in investing activities		(1,929,635)	(3,419,808)
Cash flow from financing activities
Proceeds from issue of ordinary shares		343,313	126,488
Ordinary dividends paid	13	(5,786,600)	(4,182,692)
Purchase and cancellation of own shares		-	(1,165,678)
Purchase of own shares by employee share option trust		(1,526,831)	(730,838)
Proceeds from sale of own shares by employee share option trust		414,431	293,511
Net cash used in financing activities		(6,555,687)	(5,659,209)
Net increase/(decrease) in cash and cash equivalents		1,141,742	(223,944)
Cash and cash equivalents at start of period		4,774,473	4,718,766
Effect of exchange rate changes		188,458	279,651
Cash and cash equivalents at end of period		6,104,673	4,774,473

Notes

For the year ended 31st May 2011

The contents of this preliminary announcement have been extracted from the Company's Annual Report, which is currently in print and will be distributed within the week.  The information shown for the years ended 31^st May 2011 and 31^st May 2010 does not constitute statutory accounts and has been extracted from the full accounts for the years ended 31^st May 2011 and 31^st May 2010.  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 31^st May 2010 have been filed with the Registrar of Companies.  The accounts for the year ended 31^st May 2011 will be delivered to the Registrar of Companies in due course.

1. Basis of preparation

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.

The Group Financial Statements have been prepared under the historical cost convention, except for the measurement at fair value of derivative financial instruments and certain financial assets that are held at fair value through profit or loss.  The Group Financial Statements have been prepared on a going concern basis.

(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 - Minor changes to reporting of other comprehensive income effective for annual periods beginning on or after 1st January 2011.  IAS 1 will also be amended by the changes noted below in IFRS 9.

IFRS 7Financial instruments: disclosures - Amendments effective for annual periods beginning on or after 1st January 2011 relating to clarification of qualitative and quantitative disclosures and removal of references to materiality in relation to risk.  In addition, IFRS 7 will also be amended by the changes noted below in IFRS 9.  In particular the disclosures by category of financial asset will be altered to reflect the new categorisation.

IFRS 9Financial instruments - Effective for annual periods beginning on or after 1st January 2013. This is the first part of a new standard on classification and measurement of financial assets that will replace IAS 39.  IFRS 9 replaces the four categories of financial assets with two; those carried at amortised cost and those at fair value.  The Group will need to consider how it wishes to reclassify its financial assets, in particular those currently classified as available-for-sale.  The Group's approach will determine the impact of the new standard on the financial statements.

IFRS 10 Consolidated financial statements - This standard establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. It replaces the consolidation requirements in IAS 27 - Consolidated and Separate Financial Statements and builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company.  It is effective for annual periods beginning on or after 1st January 2013. The Company is considering the impact that this standard could have on the financial statements.

There are a number of other Standards and Interpretations, and revisions to existing Standards and Interpretations, including the 2009 improvements project, in issue but not in force at 31st May 2011.  These are not considered likely to have a material impact on the Group's financial statements.

2. Basis of consolidation

These financial statements consolidate the financial statements of the Company and all of its subsidiary undertakings.  The Company's principal subsidiaries as at 31st May 2011 are City of London Investment Management Company Limited and City of London US Services Limited.

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 note 3(iii).

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:

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.

Intangible assets

The useful economic life of intangible assets, such as computer software, is determined on acquisition using value in use calculations based on management's assumptions and estimates of future cash flows.

3. Significant accounting policies

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

(i) Property and equipment

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

Short leasehold property improvements - over the remaining life of the lease

Furniture and equipment - four years

Computer and telephone equipment - four years

(ii) Intangible assets

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

Long term software licences - ten years

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

(iii) Financial instruments

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

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

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

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

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

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

•	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. Such investments are designated as available-for-sale financial assets and are measured at cost less impairment on the grounds that the fair value can not be reliably measured.

The Group's investments have been classified here for recognition and measurement purposes under IAS39 but are not necessarily reported in the statement of financial position under those headings.  A table showing how they are reported is shown in note 14.

(iv) 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.

(v) Cash and cash equivalents

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

(vi) Trade payables

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

(vii) Deferred taxation

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

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

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

(viii) Share-based payments

The Company operates an Employee Share Option Plan.  The fair value of the employee services received in exchange for share options is recognised as an expense.  The fair value has been calculated using the Binomial pricing model, and has then been expensed on a straight line basis over the vesting period, based on the Company's estimate of the number of shares that will actually vest.

In accordance with the transitional provisions of IFRS2, the above treatment has been applied only to grants of share options after 7^th November 2002 that had not vested as at 1^st June 2006.

(ix) Revenue

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

(x) Commissions payable

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

(xi) Foreign currency translation

Foreign currency transactions are translated using the exchange rates prevailing at the transaction date. 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's main trading subsidiaries, City of London Investment Management Company Limited and City of London US Services Limited, is US dollars. The functional currency of City of London Investment Group PLC (the "Company") is sterling.  The Group uses sterling as the presentation currency.  Under IAS 21 this means that exchange differences caused from translating 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 other comprehensive income and the income statement.

(xii) Leases

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

(xiii) Pensions

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

4. Revenue

	2011	2010
	£	£
Management fees earned by subsidiary companies charged as a percentage of funds under management	36,494,163	29,969,539

5. Segmental analysis

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

	USA	Canada	Europe (ex-UK)	UK	Other	Total
	£	£	£		£	£
Year to 31st May 2011
Revenue	29,968,449	1,708,514	2,198,343	2,618,857	-	36,494,163
Non-current assets:
Property and equipment	265,802	-	-	193,824	84,122	543,748
Intangible assets	363,684	-	-	-	-	363,684
Year to 31st May 2010
Revenue	24,185,206	1,702,328	1,909,388	2,026,138	146,479	29,969,539
Non-current assets:
Property and equipment	328,191	-	-	239,529	119,937	687,657
Intangible assets	409,144	-	-	-	-	409,144

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

6. Operating profit

	2011	2010
The operating profit is arrived at after charging/(crediting):	£	£
Depreciation of owned assets	325,442	302,735
Amortisation of intangible assets	45,460	45,461
Auditors' remuneration:
-  Reporting accountants on move to main market	85,000	-
- Statutory audit	57,761	44,227
- Taxation services	15,488	19,057
- Other services	9,763	14,097
Operating lease rentals:
- Land and buildings	386,168	373,955
- Other	-	12,187
Foreign exchange gains	(10,366)	(177,664)
Profit on disposal of fixed assets	-	(342)

7. Interest receivable and similar gains/(losses)

	2011	2010
	£	£
Interest on bank deposit	28,258	66,579
Gain/(loss) on sale of investments	94,064	(136,645)
	122,322	(70,066)

8. Impairment of seed investments

Due to improved market conditions, the Group has written back the remaining balance of £79,372 (2010 - £159,418) of the £238,790 impairment charge recognised in 2009 against the fair value of its seed investments in new funds held as available-for-sale financial assets.

9. Tax charge on profit on ordinary activities

(a) Analysis of tax charge on ordinary activities:

	2011	2010
	£	£
Tax at 28% (2009 - 28%) based on the profit for the year	3,859,859	2,938,223
Double taxation relief	(1,971,573)	(951,584)
Deferred tax	(24,889)	13,077
Change in tax rate of 26%	(19,830)	-
Adjustments in respect of prior years	4,791	12,957
Domestic tax total	1,848,358	2,012,673
Foreign tax for the current period	2,825,634	1,422,908
Adjustments in respect of prior years	(293,788)	(39,288)
Foreign tax total	2,531,846	1,383,620
Total tax charge in income statement	4,380,204	3,396,293

(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 - 28%).  The differences are explained below:

	2011	2010
	£	£
Profit on ordinary activities before tax	13,149,527	10,379,075
Tax at 28% (2010 - 28%) thereon	(3,681,868)	(2,906,141)
Effects of:
Unrelieved overseas tax	(854,061)	(471,324)
Expenses not deductible for tax purposes	(159,044)	(30,979)
Capital allowances less than depreciation	(57,754)	(63,911)
Prior period adjustments	288,997	26,331
Deferred tax on share based-payments and impairment	24,889	(13,077)
Impairment in seed investments not tax deductible	22,224	44,637
Change in tax rate to 26%	19,830	-
Other	16,583	18,171
Total tax charge in income statement	(4,380,204)	(3,396,293)

On 23rd March 2011 the Chancellor announced a reduction in the main rate of UK corporation tax to 26% with effect from 1st April 2011. Therefore, the effect of the rate reduction has been reflected in the figures above.

10. Earnings per share

The calculation of earnings per share is based on the profit for the period of £8,769,323 (2010 - £6,982,782) divided by the weighted average number of ordinary shares in issue for the year ended 31st May 2011 of 24,998,168 (2010 - 24,491,592).

The Employee Benefit Trust held 1,632,167 ordinary shares in the Company as at 31st May 2011.  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 £8,769,323 (2010 - £6,982,782) divided by the diluted weighted average of ordinary shares for the year ended 31st May 2011 of 25,818,990 (2010 - 25,953,758).

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

	2011	2010
	Number of shares	Number of shares
Weighted average number of shares - basic earnings per share	24,998,168	24,491,592
Effect of dilutive potential shares - share options	820,822	1,462,166
Weighted average number of shares - diluted earnings per share	25,818,990	25,953,758

11. Share capital

	2011 No. of shares	2010 No. of shares
Authorised
Ordinary shares of 1p each (2010 - 1p each)	90,000,000	90,000,000
	£	£
Ordinary shares of 1p each (2010 - 1p each)	90,000	90,000
	2011	2010
	£	£
Allotted, called up and fully paid
At start of year 25,968,803 (2010 - 25,981,603) Ordinary shares of 1p each	259,688	259,816
Dilutive share options exercised; 889,647 (2010 - 426,200)	8,896	4,262
Shares repurchased and cancelled; nil (2010 - 439,000)	-	(4,390)
At end of year 26,858,450 (2010 - 25,968,803) Ordinary shares of 1p each	268,584	259,688

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

12. 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 2011 the Trust held 1,632,167 ordinary 1p shares (2010 - 1,589,158), of which 1,421,292 ordinary 1p shares (2010 - 1,427,533) were subject to options in issue.

13. Dividends

	2011	2010
	£	£
Dividends paid:
Interim dividend of 8p per share (2010 - 7p)	2,046,663	1,727,652
Final dividend in respect of year ended:
31st May 2010 of 15p per share (2009 - 10p)	3,739,937	2,455,040
	5,786,600	4,182,692

A final dividend of 16p per share has been proposed, payable on 21^st October 2011, subject to shareholder approval, to shareholders who are on the register of members on 7^th October 2011.

14. Financial instruments

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

(i) Financial instruments by category

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

31st May 2011 Assets as per statement of financial position	Loans and receivables £	Assets at fair value through profit or loss £	Available-for-sale £	Total £
Other financial assets	-	-	73,210	73,210
Trade and other receivables	5,241,448	334,563	-	5,576,011
Available-for-sale financial assets	-	-	5,807,787	5,807,787
Cash and cash equivalents	6,104,673	-	-	6,104,673
Total	11,346,121	334,563	5,880,997	17,561,681

Liabilities as per statement of financial position	Liabilities at fair value through  profit or loss £	Financial liabilities at amortised cost £	Total £
Trade and other payables	-	4,013,419	4,013,419
Total	-	4,013,419	4,013,419

31st May 2010 Assets as per statement of financial position	Loans and receivables £	Assets at fair value through profit or loss £	Available-for-sale £	Total £
Other financial assets	-	-	76,679	76,679
Trade and other receivables	4,365,999	-	-	4,365,999
Available-for-sale financial assets	-	-	3,595,873	3,595,873
Cash and cash equivalents	4,774,473	-	-	4,774,473
Total	9,140,472	-	3,672,552	12,813,024

Liabilities as per statement of financial position	Liabilities at fair value through  profit or loss £	Financial liabilities at amortised cost £	Total £
Trade and other payables	401,660	3,486,121	3,887,781
Total	401,660	3,486,121	3,887,781

(ii) Fair value measurements recognised in the statement of financial position

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable.

•	Level 1: fair value derived from quoted prices (unadjusted) in active markets for identical assets and liabilities.
•	Level 2: fair value derived from inputs other than quoted prices included within level 1 that are observable for the assets or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
•	Level 3: fair value derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data.

The fair values of the financial instruments are determined as follows:

•	Investments in own funds are determined with reference to the net asset value (NAV) of the fund.  Where the NAV is a quoted price the fair value is shown under level 1, where the NAV is not a quoted price the fair value is shown under level 2.
•	Forward currency trades are valued using the prevailing quoted exchange rates and are shown under level 2.

The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement.

31st May 2011	Level 1 £	Level 2 £	Level 3 £	Total £
Available-for-sale financial assets
Investment in own funds	2,336,763	3,498,636	-	5,835,399
Total	2,336,763	3,498,636	-	5,835,399
Financial assets at fair value through profit or loss
Forward currency trades	-	334,563	-	334,563
Total	-	334,563	-	334,563

31st May 2010	Level 1 £	Level 2 £	Level 3 £	Total £
Available-for-sale financial assets
Investment in own funds	1,816,491	1,804,472	-	3,620,963
Total	1,816,491	1,804,472	-	3,620,963
Financial assets at fair value through profit or loss
Forward currency trades	-	(401,660)	-	(401,660)
Total	-	(401,660)	-	(401,660)

There were no transfers between any of the levels in the reporting period.

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

Where there is an impairment in the investment in own funds the loss is reported in the income statement.  Due to improved market conditions again this year, the Group has written back the remaining balance of £79,372 (2010 - £159,418) of the £238,790 impairment charge recognised in 2009.

The fair value profit on the forward currency trades is offset in the income statement by the foreign exchange loss on other currency assets and liabilities held during the year and at year end.  The net gain reported for the year is £10,366 (2010 - net gain £177,664).

(iii) Foreign currency risk

Most of the Group's revenues, and a significant part of its expenses, are denominated in currencies other than sterling, principally US and Canadian Dollars.  These revenues are derived from fee income which is based upon the net asset value of accounts managed, and have the benefit of a natural hedge by reference to the underlying currencies in which investments are held.  Inevitably, debtor and creditor balances arise which in turn give rise to currency exposure.  Each of the Group's subsidiaries eliminates its currency exposure by transfer to the holding company.  All hedging activity is therefore assessed at the Group level.  Forward foreign exchange transactions are executed so as to substantially reduce the Group's exposure to currency market movements.  The level of forward currency hedging is such as is judged by the Directors to be consistent with market conditions.

As at 31st May 2011, the Group had net asset balances of US$11,694,999 (2010 - US$6,854,423), offset by forward sales totalling US$13,500,000 (2010 - US$6,500,000), and net asset balances of C$401,876 (2010 - C$411,851) and SGD1,051,314 (2010 - SGD1,049,466).

Had the US Dollar strengthened or weakened against Sterling as at 31st May 2011 by 10%, with all other variables held constant, there would have been no material impact on the Group's net assets, because the US Dollar position is minimised by the forward sales.

Further details on the effects on the Group's post-tax profits due to movements in the US Dollar/Sterling exchange rate have been demonstrated in the Financial review above.

- ends -

 

END

 

 

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