Final Results

RNS Number : 2909L

City of London Investment Group PLC

03 September 2012

 



3^rd September 2012

CITY OF LONDON INVESTMENT GROUP PLC (LSE: CLIG)

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

FINAL RESULTS FOR THE YEAR TO 31^st MAY 2012

SUMMARY

·   Funds under management (FuM) at 31^st May 2012 were US$4.5 billion (2011: US$5.8 billion), a decline of 23%.  In sterling terms, FuM fell by 18% to £2.9 billion (2011: £3.5 billion).  The MSCI Emerging Markets Index (MXEF) registered a 20% decline over the whole of the financial year with the major part of the fall occurring in the final quarter.

·   FuM at the end of August 2012 were US$4.4 billion, a fall of 1.7% since the financial year end.  This compares to a rise of 5.7% in MXEF over the same period.  The shortfall reflects net client withdrawals, largely prompted by rebalancing of risk assets by asset allocators, together with marginal underperformance deriving in the main from underlying net asset value weakness and supplemented by some further discount widening.

·   Revenues, representing the Group's management charges on FuM, were £34.1 million (2011: £36.5 million).  Profit before tax was £11.5 million (2011: £13.1 million).

·   Basic earnings per share were 33.8p (2011: 35.1p) after a reduced tax charge of 26% (2011: 33% of pre-tax profits), reflecting the positive impact of prior year adjustments to the Group's US and Singapore tax charges.

·   Recommended maintained final dividend of 16p per share, payable on 19^th October 2012 to shareholders on the register on 5^th October 2012, making a total for the year of 24p (2011: 24p)

·   Cash and cash equivalents at 31 May 2012 were £5.4 million (2011: £6.1 million).

Andrew Davison, Chairman, said, "These results provide a demonstration of the Group's ability to generate profits and dividends for our shareholders even in the difficult market conditions that we have had to deal with over the last 12 months.  This is a reflection of our core belief in keeping fixed costs to a minimum, and our continual striving to achieve superior investment performance so as to reward, and therefore to retain and grow our client base."

Barry Olliff, CEO, added, "The outlook for both our business and the emerging markets at present remains difficult to forecast.  Euro problems seem likely to be with us for some time and will not be solved until there is more pain.  Inevitably the solution will be for the underleveraged or good credits to assist the poor credits on terms that they find mutually acceptable.  Meanwhile we will continue to find that we swing around in multiples of 10% (MXEF), just based upon emotion.  We will continue to attempt to take advantage of these mood swings and will use these anomalies of mispricing as we have over many years."

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

Doug Allison (Finance Director)	Simon Hudson / Kelsey Traynor
City of London Investment Group Plc	Tavistock Communications
Tel: [phone]	Tel: [phone]
Claes Spang	Martin Green
Singer Capital Markets Limited	Canaccord Genuity Limited
Financial Adviser & Joint Broker	Joint Broker
Tel: [phone]	Tel: [phone]

Chairman's statement

Our principal investment markets in the year under review were marked by an unwelcome return to high, and continuing, levels of volatility as investors became increasingly risk averse.  This volatility has been reflected in a 31% rise in the MSCI Emerging Markets Index ("MXEF") from a low recorded in October 2011 to its high in March 2012, which was followed by a 15% fall in the period up to the Group's year end on 31^st May 2012.

As a consequence, Funds under Management ("FuM") declined by 17% to US$4.8 billion in the first half of our financial year to 30^th November 2011 and ended the year at US$4.5 billion, representing an annual decline of 23% in US$ terms from the US$5.8 billion recorded at 31^st May 2011.  In sterling terms, FuM declined by 18% to £2.9 billion (2011: £3.5 billion).  MXEF registered a 20% decline over the whole of our financial year with the major part of the fall occurring in our final quarter.

Despite the volatility, our clients have remained loyal and the vast majority have, sensibly in our view, taken a longer term view of the undoubted attractions of emerging markets, which in many instances are better placed to withstand shocks than the perceived 'safe haven' markets of the developed economies.

Results

Revenues, representing the Group's management charges on FuM, for the year to 31^st May 2012 were £34.1 million (2011: £36.5 million) with the decline resulting from the fall in MXEF, and thus our FuM, over the period.  Profit before tax was £11.5 million (2011: £13.1 million after one-off listing costs of £0.4 million) including a gain of £0.4 million on the sale of an investment in options on unquoted equity (2011: £nil).  The tax charge for the year, at 26% of pre-tax profits (2011: 33% of pre-tax profits), reflects the positive impact of prior year adjustments to the Group's US and Singapore tax charges.  Basic earnings per share were 33.8p (2011: 35.1p) and fully diluted earnings per share were 32.8p (2011: 34.0p).  Cash and cash equivalents at 31^st May 2012 were £5.4 million (2011: £6.1 million).

Dividends

The Board has recommended the payment of a maintained final dividend of 16p per share to be paid on 19^th October 2012 to shareholders on the register on 5^th October 2012.  Together with the interim dividend of 8p per share (2011: 8p) paid in February 2012, this makes a total for the year of 24p per share (2011: 24p) covered 1.41 times by earnings per share (2011: 1.46 times).

Board

There have been three changes to the Non-executive Directors during the year.  We appointed Rian Dartnell to the Board in June 2011 and George Robb, one of our longest serving Non-executive Directors, retired from the Board in January this year and was replaced by Lynn Ruddick.

Rian, a US citizen and resident, is Chief Investment Officer for global asset managers Granite Associates and has spent his career focusing on investment in emerging markets worldwide.  Lynn retired from Merrill Lynch Investment Managers, where she headed their investment trust business unit in 2004, and is a Director of a number of investment trusts in the UK and a former Chairman of the Investment Committee of the National Association of Pension Funds.

I welcome Rian and Lynn to the Board and wish George, who has provided wise advice and cheerful company, a long and happy retirement.

Finally, I must advise shareholders of my own intention to retire from the Board at the conclusion of our forthcoming Annual General Meeting.  I have been Chairman of City of London for the past 13 years, during which time the Company has gone through an IPO on AIM, with an upgrade to the main market almost two years ago, and the value of the Company has grown from around £13 million to £94 million today.  I will retire with confidence that the Company's future is secure and that the high quality Board and senior management team will provide shareholders with the guidance and leadership necessary to navigate successfully the volatile markets that we are currently experiencing.  My successor as Chairman will be David Cardale who joined the Board at the time of our going public in 2006 and has been the Senior Independent Non-executive Director since 2008.

Newlin Foundation

Barry Olliff has previously made clear his intentions to sell 250,000 shares at each of £4.50, £5.00, £5.50 and £6.00, and that commitment is re-affirmed.  The Newlin Foundation, a US foundation endowed by Barry, has been released from its similar commitment in order to preserve its status as an independent charity.

Employee Share Option Plan (ESOP)

The City of London Employee Benefit Trust currently holds 6.4% of the Company's issued share capital on behalf of the Group's Employee Share Option Plan.  In order to increase our ability to attract and retain staff through the issue of non-dilutive options - the EBT buys shares in the market - the Board wishes to have the flexibility to hold up to 10% of the Company's issued share capital in the ESOP.  For holdings above 5%, the ABI recommends that shareholder approval be obtained and we have accordingly proposed an appropriate resolution to be put to shareholders at the AGM.

Outlook

These results provide a demonstration of the Group's ability to generate profits and dividends for our shareholders even in the difficult market conditions that we have had to deal with over the last 12 months.  This is a reflection of our core belief in keeping fixed costs to a minimum, and our continual striving to achieve superior investment performance so as to reward and therefore to retain and grow our client base.

We are aware of the inevitable and unforecastable fluctuations in the world economy which will impact on the Group.  Times are difficult but, providing we produce acceptable results for our clients, we should continue to report acceptable results to our shareholders.

As usual, I must thank all of our hardworking staff in London, the US, Singapore and Dubai for their efforts in these challenging times.  Without their commitment we would not be reporting these very creditable results.  I will update shareholders on our progress in the first part of our financial year at the time of the Annual General Meeting, which will be held on 1^st October 2012.

Andrew Davison

Chairman

30^th August 2012

Chief Executive Officer's review

Funds under Management ("FuM")

FuM ended the year at US$4.5 billion, having fallen from US$5.0 billion at the end of April due purely to a downturn in markets, with the MSCI Emerging Markets Index ("MSCI") falling by 11% during the last month of our financial year, and 15% in the final quarter.  Disappointing as this was, the impact on results was limited, because fee income accrues throughout the year based (generally) on each of twelve month end valuation points, and I believe that the post-tax profit of £8.5 million (2011: £8.8 million) was a creditable return within the context of another year of relatively high market volatility.

Transition

As you are aware from previous shareholder communications, over the next year Doug Allison will be taking over the role of CEO from me. I will retain the position of Chief Investment Officer.

This transfer of responsibilities has been planned for over three years. I would like to wish Doug well in terms of his additional responsibilities.  Doug joined CLIG in 1997 as Finance Director.  Over the past fifteen years Doug and I have worked very closely together and with Tom Griffith and Carlos Yuste, who both joined in 2000, we have been very fortunate to have a consistent management team for twelve years.

With the same team but with transferred CEO responsibilities the face of CLIG will effectively remain the same hopefully until my retirement, which based upon current plans will be in 2017.

Andrew Davison has announced his intention to stand down from the Board at the AGM. I would like to record my thanks to Andrew for his contribution over many years and to wish him a long and happy retirement. I am confident that David Cardale, who succeeds Andrew as Chairman having been a non-executive director for over five years, will provide a seamless transition.

Investment Performance

This year has been a year of consolidation.  After a poor start the Emerging Markets Closed-End Funds' (CEF) Group investment performance picked up towards the end of the financial year as a result of CEF's (a majority of which were in the US) announcing buy backs, tender offers, open endings and liquidations. Invariably this was in response to the wide discounts at which many of the securities within our universe were trading.  While we have since given back some of that performance, and the CEF environment remains challenging, corporate actions seem likely to continue until discounts return to a more acceptable level.  This year the focus will be to a greater extent on UK investment trusts.  Meantime the Group's other products experienced different fortunes, with the Developed CEF and Frontier products performing strongly, but the Emerging Markets and Natural Resource equity strategies faring significantly less well.

CEF Discounts

Last year one of the themes of my CEO Statement was regarding the responsibilities and remuneration of specifically US CEF Directors.

In terms of the past year these responsibilities have been one of our key areas of focus. In excess of 75% of the transactions that have been announced as they relate to our clients assets have involved US Emerging Market CEF's.  We would like to believe that not only has the oversupply of product started to be reduced but that the sector is in a state of improvement.  One of the main complaints regarding the CEF industry is the unacceptably high volatility of share price performance relative to NAV performance.  It seems extraordinary that CEF Boards do not understand that what is often tracking (NAV) investment performance relative to a relevant benchmark is associated with, on many occasions, in excess of 6% of share price volatility.

When this is compared with around 2% of share price volatility from an ETF one can see why retail investors can often find ETF's a better product.  Having said that just about every ETF underperforms a comparable CEF benchmark over an extended period.

The raising of awareness amongst CEF Boards regarding standards generally, including accountability, openness, the quality of research information, profile, the quality of attribution information and outreach, are issues that many Boards unfortunately do not consider their responsibility.  It's only when we and others make the point to CEF Boards that these are businesses - it's just that their business involves the provision of a portfolio - that Directors seem to start to understand that as businesses they have all of the requirements of a US corporation or a UK PLC.

The competitive positioning of CEF's

We would suggest that it is of paramount importance that CEF products need to be relevant and competitive with other comparable products in the marketplace.  They need to be well designed, they need to be marketed, they need to be attractively priced and they need to perform well.  Obviously in the event that Boards get push-back from Management regarding these issues then we would suggest that they should undertake what any Board of a corporation would do under similar circumstances, they should change the Management.

We are often asked what we consider to be fair value for a collection of well selected securities that outperform a relevant benchmark when a CEF is successfully marketed.  Obviously the answer to this question is the same relative value as was placed on the Fund at the point of launch.  That is to say as if the fund is as relevant as it was on the day of launch.

In our opinion CEF's are consumer products. But how many consumer products look the same even after five, let alone ten or in some instances 100 years!  Our point is that they have to be made relevant for today's marketplace or go the way of tyrannosaurus rex.

Our Business and Employee Share Ownership

We have continued to manage our business very conservatively.  We have continued to attempt to keep costs down.  We do not spend shareholders' funds entertaining and we generally attempt to manage our business as if shareholders were present in our offices every day of the week.  One reason I would suggest that expenses are kept down is because staff are either shareholders themselves or own shares via the CLIG ESOP.  At present staff own (including ESOP ownership) 27.9% of CLIG shares, and 75 out of 82 of us are incentivised in this way (a handful of more recent recruits do not yet hold options).  I would make the additional point that while my own ownership has reduced from a high of 20.2% to the present 13.5%, ownership by the other directors and staff has increased since the Group was first listed on AIM from  2.3% to 8.0% (excluding the ESOP).

As shareholders are aware, we run a business with a very simple business model.  We collect fees from our clients for our services, we pay our bills which are both forecastable and to a great extent fixed.  We don't use leverage, nor off-balance sheet instruments, nor do we trade derivatives as principal (other than occasional low level hedging).  There are no associated companies or minority interests within the Group. We do not use tax havens.  We do not handle client monies.  We have a significant amount of cash in the bank relative to our size and we basically stick to what we know.

Corporate Governance

We have successfully completed an SSAE 16 examination of our internal controls. This internationally recognised standard reports on the design and operating effectiveness of the controls within a service organisation. As part of the examination, we developed control objectives for critical internal functions that support the key services offered to Clients.

Diversification

As shareholders are aware we have tried to diversify our business using the two skill-sets that we possess where we believe that we can add value, namely Closed-end Funds and Emerging Markets.  Recent continuing volatility has meant that it's been a difficult environment for us to market new products.  Potential clients have generally been more interested in focusing on existing issues rather than contemplating new risks via new managers.

While growth to date has been exclusively organic, we have looked at a number of potential acquisition opportunities in the past and it's probably fair to say that in recent times we have become increasingly active in that respect. This is a people business, so not only does the logic have to be there but the chemistry has to be right. The logic is probably in fact the easiest part. We have an infrastructure that has the capacity to support additional products and teams, we have the marketing resource and we are keen to add to our Emerging Market capability, in particular as regards equities and perhaps bonds. Chemistry, or maybe the right word is culture, has tended to be the harder fit to find. My point is though that we continue to evaluate opportunities and we expect at some point to have something to show for our efforts.

Profit-share

With regard to remuneration we continue to distribute 30% of our profits as profit-share.  Our staff, clients and shareholders understand this formulaic approach.  It's a pity that this approach has not been embraced by the financial service industry generally.  As it is, in many parts of the financial services industry it seems as if losses are not the responsibility of mangers rather it's the shareholders who take the rap.  Whilst our formulaic approach seems out of keeping with many in our industry, at least our shareholders have an idea that our returns go up and down together with theirs.

Outlook

The outlook for both our business and the emerging markets at present remains difficult to forecast.  Euro problems seem likely to be with us for some time and will not be solved until there is more pain.  Hopefully with more pain will come an awareness that kicking the can down the road (via a lack of leadership) does not work?

Inevitably the solution will be for the underleveraged or good credits to assist the poor credits on terms that they find mutually acceptable.  This is what has happened on previous occasions such as, for example, the Asia Crisis and with Brady Bonds.  Meanwhile we will continue to find that we swing around in multiples of 10% (MXEF) just based upon emotion.

We will continue to attempt to take advantage of these mood swings and will use these anomalies of mispricing as we have over many years.

I would like to thank staff for their support in what has been a challenging year.

Barry Olliff,

Chief Executive Officer

30^th August 2012

Business review

Ongoing volatility over the period in global equity markets led many institutional investors to reduce their exposure to risk assets, including emerging markets.  Our clients have continued to take a long term view, and net withdrawals over the 15 months to 30^th August 2012 totalled less than US$400 million.

Rather than continuing to spend shareholders' funds on marketing initiatives in this environment, we have focused on retaining clients and building awareness of some of the new products with a limited number of consultants.

As we noted in last year's annual report, 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

Diversification efforts continue to prioritise the Developed Closed-end fund strategy, with the third anniversary of the launch of this product in September 2012 representing a significant milestone with respect to marketing opportunities, particularly within the context of the consultant universe. The product continues to exhibit consistent outperformance.  In order to extend the product offering, a new sub-fund was launched under the World Markets Umbrella Fund in Dublin in January for our Developed closed-end fund strategy. This will complement our US institutional fund launched last year. Global composite investment returns for the developed market closed-end fund strategy for the year ending May 31st, 2012 were -16.5% versus -20.5% for the benchmark in USD and -10.8%  versus -15% for the benchmark in GBP.

The Frontier Emerging Markets Fund has also consistently outperformed its benchmark since its inception in 2005, and is now beginning to attract the attention of investment consultants and institutional prospects. Composite investment returns for the Frontier Emerging Market Closed-end fund strategy for the rolling one year ending 31^st May, 2012 were -9.9% versus -16.6% for the benchmark in USD and -3.6% versus -10.8% for the benchmark in GBP.

Also of note over the period was the performance of the Asia, ex Japan, small capitalisation stock strategy, which now has an 18 month track record. 

We are pleased to report that City of London Investment Management Company Limited (CLIM) was recently notified by the China Securities Regulatory Commission of approval for a Qualified Foreign Institutional Investor (QFII) account allocation US$100 million. CLIM's China A Share Fund has been invested in Chinese A Shares since 2003 and has generated first quartile performance over all annualised periods since inception. We will be marketing the new QFII allocation to prospects beginning immediately.

Performance

Global composite investment returns for the emerging market Closed-end fund strategy for the year ending 31^st May 2012 were -21.7% versus -19.9% for MXEF in USD and -16.3% versus -14.5% for MXEF in GBP.  Underperformance was attributable to ongoing widening discounts to net asset value (NAV) across the emerging markets closed-end fund universe.  NAV performance also contributed to underperformance.

The investment team is engaging with boards of directors in order to improve corporate governance and reduce the number of shares in issue as a means to narrow historically wide discounts. We expect this focus on corporate governance to add an increment of outperformance above and beyond the alpha generated by the trading of discounts.

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 Developed closed-end fund capability, Frontier Emerging Market and China A Share closed-end fund capability will be the focus of our product diversification and business development activities.

Carlos Yuste

Business Development Director

30^th August 2012

Financial review

Consolidated income statement and statement of comprehensive income

The easiest way to understand the Group's  income statement is to think in terms of net fee income, represented by gross fee income less "direct" costs (commissions payable and custody fees ), and then deduct the various operating costs that are more indirect in nature (which could be referred to as "overheads").  Expanding on some of these elements:

·   Gross fee income of £34.1 million (2011: £36.5 million) is the management fees charged by the Group to its client accounts, some of which are in the form of commingled funds and others of which are segregated accounts (i.e. specific to a single client).

·   Commissions payable are fees that we pay to agents for the introduction of clients, which this year amounted to £5.2 million (2011: £5.8 million). All bar a tiny part of this relates to North Bridge Capital, who until October 2010 were engaged on the basis that they would receive 20% of the fee income charged to the client, for a "trail" period of ten years from first investment.

·   Custody fees of £1.4 million (2011: £1.2 million) are the fees that we pay to custodian banks for the safekeeping and administration of the assets of the commingled funds (segregated account clients pay their own custody fees).

The net of the above elements is £27.5 million (2011: £29.5 million), and this is what I would describe as "net fee income". As a percentage of the funds under management ("FuM"), net fee income is currently  about 0.87%, or 87 basis points, which compares to the 86 basis points noted in last year's report. The reason for the slight increase is that there have been a small number of withdrawals related to accounts which remain subject to the North Bridge Capital charge (i.e. they are less than 10 years old), some of which have effectively been replaced by new money which is not subject to that charge, thereby nudging the weighted average net fee slightly higher. Over the next eight years the fees payable to North Bridge Capital will run-off in accordance with the contractual ten year trail, which all things being equal will result in a higher net fee margin for the Group. The table below illustrates the rate of run off of the North Bridge Capital commission, based upon current FuM and market levels.

North Bridge Capital commission run-off (based on FUM at 31^st July 2012)

Financial year	£m (@US$1.55/£1)
2012-2013	4.4
2013-2014	4.2
2014-2015	3.7
2015-2016	2.9
2016-2017	2.5
2017-2018	2.0
2018-2019	1.1
2019-2020	0.3
2020-2021	0.1

"Overheads" then total £11.1 million (2011: £10.1 million), the largest component of which is staff costs (essentially salaries, benefits, and related employment taxes, but in this context excluding profit-share payments) at £6.8 million (2011: £ 6.0 million).

Net fee income less overheads therefore amounted to £16.4 million (2011: £19.4 million), and it is at this measure of profit that the 30% profit-share provision is applied, which with associated employment taxes totalled £5.4 million (2011: £6.1 million), thereby arriving at operating profit of £11.0 million (2011: £12.9 million, net also of listing costs of £0.4 million).

Finally, there is interest and investment income of £0.4 million (2011: £0.2 million). This is essentially the gain of £0.4 million (2011:£nil) on the disposal of the investment in Enhanced Investment Products, which was described fully in the Group's Half Year Report. Note that the potential additional gain of US$0.5 million, which was contingent upon certain outcomes unrelated to the Group, was unfortunately not realised. In addition, interest income of £0.1 million was offset by losses on traded options at a similar level.

Pre-tax profit rounded to £11.5 million (2011: £13.1 million). Corporation taxes at £3.0 million (2011: £4.4 million) were somewhat reduced by one-off adjustments with respect to prior year accruals for taxes on the Group's US and Singapore operations, each at around £0.2 million.

Post-tax profit of £8.5 million (2011: £8.8 million) is adjusted downwards by £0.7 million to arrive at total comprehensive income of £7.8 million (2011: £9.2 million), the adjustment being the downward revaluation of the Group's seed investments (2011: upward revaluation of £0.5 million, less £0.1 million taken as realised gains).

Consolidated statement of financial position and statement of changes in equity

The principal components of net assets of £15.3 million (2011: £14.3 million) are "available-for-sale financial assets" of £6.9 million (2011: £5.8 million) and cash of £5.4 million (2011: £6.1 million), with these two line items accounting for 92% of the net current assets of £13.4 million (2011: 98% of net current assets of £12.1 million). As noted in previous reviews, the title "available-for-sale financial assets" is potentially confusing, because these seed investments in our diversification products are intended to be long term - typically not less than three years - and would be liquidated only at the point they are no longer needed, which would be either because the relevant fund had attracted third party investment or, perhaps, because the Group had decided that the product in question should be withdrawn from distribution. At the end of the year the seed investments were spread across six funds, spanning the developed closed-end fund strategy, the absolute return closed-end fund strategy, and natural resource and emerging markets equities products.

The balance of net current assets is represented by the excess of trade and other receivables over trade and other payables, including tax. Non-current assets comprise property and equipment of £0.6 million (2011: £0.5 million), capitalised software licences of £0.4 million (2011: £0.4 million), and the deferred tax asset of £0.9 million (2011: £1.4 million). The latter is an estimate of the future corporation tax savings to be derived from the exercise of share options in issue at the financial year end.

The main factor behind the £1.0 million increase in net assets (2011: £3.7 million increase) is of course the profit for the year of £8.5 million (2011: £8.8 million), net of dividends paid during the year which totalled £6.1 million (2011: £5.8 million). The dividend comprised the 16p final dividend for 2010/11 plus the 8p interim dividend for the current year (2011: 15p final for 2009/10 plus 8p interim for 2010/11).

Adverse market conditions, particularly in the last quarter of the year,  resulted in a downward revaluation of the seed investments referred to above, which had the effect of reducing net assets by £0.7 million (2011: upward revaluation of £0.4 million, net of realised gains).

The remainder of the changes in net assets result in one form or another from transactions related to the Group's shares. Shares to the value of £0.5m (2011: £1.5 million) were purchased via the Group's ESOP trust, this outlay being offset by the proceeds of share option exercises at £0.2 million, including corporation tax allowances (2011: £1.8 million). The share option reserve decreased by £0.3m net of the associated deferred tax provision (2011: £0.0 million, rounded).

Consolidated cash flow statement

Net cash generated from operating activities was £7.7 million (2011: £9.6 million), once again illustrating that there are relatively few significant timing differences that would cause cash flow to deviate materially from profits. The principal applications for this cash have been dividends of £6.1 million (2011: £5.8 million), and net additions to the Group's seed investments of £2.0 million (2011: £1.7 million). Taking into account the purchase of shares for the ESOP and the proceeds of share option exercises, as mentioned above, the overall effect was a decrease of £0.6 million in cash (2011: increase of £1.1 million).

Currency exposure

As in past years, the Group's income remains almost exclusively US dollar denominated, while expenses are incurred in sterling, Singapore dollars, and United Arab Emirates dirhams, as well as US dollars, reflecting the locations of the four offices through which the business is conducted. This would superficially suggest a potentially significant exposure to US dollars, but in reality the position is not that simple. Fee income is denominated in US dollars, and is assessed by reference to client account net asset values which are expressed in US dollar terms, but the currencies that underlie those net asset values, notwithstanding their translation into US dollars for valuation purposes, are to all intents and purposes those of the emerging market economies around the world to which our funds are exposed. In other words the US dollar is a tool to provide the measure of value and therefore the calculation of fees, but it is not the true currency base of the Group's fee income.

Putting this to one side, it is nevertheless true to say that at a given level of FuM, the US dollar/sterling exchange rate is a major determinant of reported income, because that income will be received in US dollars and translated for reporting purposes into sterling. Within this context, the impact of the US dollar/sterling exchange rate upon profit can be illustrated in the form of the table below, which takes the components of the profit figure as outlined above (net fee income; overheads; profit-share; tax), and on the assumption that those components are stable at the levels shown (which reflect current trading conditions), shows the resultant post-tax profit expectation at the specific levels of FuM and of the US dollar/sterling exchange rate listed.

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

FuM - US$bn	4.0	4.5	5.0	5.5
US$/£	Post-Tax, £m:
1.45	5.9	7.4	8.8	10.2
1.50	5.6	7.0	8.4	9.8
1.55	5.4	6.7	8.0	9.4
1.60	5.1	6.4	7.7	9.0
1.65	4.9	6.1	7.4	8.7

Assumes:

1. Average net fee 87 bp's

2. Annual operating costs £4.7m plus US$8.7m plus S$1.7m (£1 = S$2.00)

3. Profit-share 30%

4. Average tax 32%

If the Group were to hold significant net assets in currencies other than sterling, the calculations in the table would potentially be affected by the translation effects of currency movements. In order to reduce or avoid unpredictable distortion of this nature, the Group's balance sheet exposure to the US dollar is hedged by forward sales of US dollars for sterling. At 31^st May these forward sales totalled US$11.8 million, with a weighted average exchange rate of US$ 1.59 to £1 (2011: US$13.5 million at a weighted average rate of US$1.58 to £1).

Doug Allison

Finance Director

30^th August 2012

Consolidated income statement

For the year ended 31^st May 2012

		Total	Total
		2012	2011
	Note	£	£
Revenue	3	34,142,706	36,494,163
Administrative expenses
Staff costs		12,177,561	12,034,066
Commissions payable		5,194,630	5,785,441
Custody fees payable		1,433,342	1,158,086
Other administrative expenses		3,955,738	3,760,057
Main market listing costs		-	437,778
Depreciation and amortisation		347,591	370,902
		(23,108,862)	(23,546,330)
Operating profit	5	11,033,844	12,947,833
Interest receivable and similar gains	6	427,670	122,322
Reversal of impairment of seed investments	7	-	79,372
Profit before taxation		11,461,514	13,149,527
Income tax expense	8	(2,963,660)	(4,380,204)
Profit for the year		8,497,854	8,769,323
Basic earnings per share	9	33.8p	35.1p
Diluted earnings per share	9	32.8p	34.0p

Consolidated statement of comprehensive income

For the year ended 31^st May 2012

	2012	2011
	£	£
Profit for the year	8,497,854	8,769,323
Fair value (losses)/gains on available-for-sale investments*	(720,952)	461,154
Release of fair value (gains) on disposal of available-for-sale investments*	(14,128)	(62,394)
Other comprehensive income	(735,080)	398,760
Total comprehensive income for the year attributable to equity holders of the company	7,762,774	9,168,083

* Net of deferred tax

Consolidated statement of financial position

31^st May 2012

		2012	2011
	Note	£	£
Non-current assets
Property and equipment		607,437	543,748
Intangible assets		352,319	363,684
Other financial assets		31,354	73,210
Deferred tax asset		929,692	1,380,017
		1,920,802	2,360,659
Current assets
Trade and other receivables		5,345,334	5,576,011
Available-for-sale financial assets		6,924,552	5,807,787
Cash and cash equivalents		5,399,869	6,104,673
		17,669,755	17,488,471
Current liabilities
Trade and other payables		(3,891,267)	(4,013,419)
Current tax payable		(410,705)	(1,340,386)
Creditors, amounts falling due within one year		(4,301,972)	(5,353,805)
Net current assets		13,367,783	12,134,666
Total assets less current liabilities		15,288,585	14,495,325
Non-current liabilities
Deferred tax liability		-	(235,129)
Net assets		15,288,585	14,260,196
Capital and reserves
Share capital	10	268,784	268,584
Share premium account		1,980,084	1,975,084
Investment in own shares		(4,560,603)	(4,183,659)
Fair value reserve		(65,869)	669,211
Share option reserve		1,267,553	1,621,936
Capital redemption reserve		18,562	18,562
Retained earnings		16,380,074	13,890,478
Total equity		15,288,585	14,260,196

Approved and authorised for issue by the Board of Directors on 30^th August 2012.

Consolidated statement of changes in equity

31^st May 2012

	Share capital	Share premium account	Investment in own shares	Fair Value reserve	Share option reserve	Capital redemption reserve	Retained earnings	Total attributable to shareholders
	£	£	£	£	£	£	£	£
At 1st 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 1st June 2011	268,584	1,975,084	(4,183,659)	669,211	1,621,936	18,562	13,890,478	14,260,196
Profit for the year	-	-	-	-	-	-	8,497,854	8,497,854
Comprehensive income	-	-	-	(735,080)	-	-	-	(735,080)
Total comprehensive income	-	-	-	(735,080)	-	-	8,497,854	7,762,774
Transactions with owners
Share option exercise	200	5,000	136,632	-	(18,685)	-	18,685	141,832
Purchase of own shares	-	-	(513,576)	-	-	-	-	(513,576)
Share-based payment	-	-	-	-	195,940	-	-	195,940
Deferred tax	-	-	-	-	(531,638)	-	(8,267)	(539,905)
Current tax on share options	-	-	-	-	-	-	33,392	33,392
Dividends paid	-	-	-	-	-	-	(6,052,068)	(6,052,068)
Total transactions with owners	200	5,000	(376,944)	-	(354,383)	-	(6,008,258)	(6,734,385)
At 31st May 2012	268,784	1,980,084	(4,560,603)	(65,869)	1,267,553	18,562	16,380,074	15,288,585

Consolidated cash flow statement

For the year ended 31^st May 2012

		2012	2011
	Note	£	£
Cash flow from operating activities
Operating profit		11,033,844	12,947,833
Adjustments for:
Depreciation charges		336,226	325,442
Amortisation of intangible assets		11,365	45,460
Share-based payment charge		195,941	130,241
Translation adjustments		(108,680)	53,320
(Profit)/loss on disposal of fixed assets		(72)	-
Cash generated from operations before changes in working capital		11,468,624	13,502,296
Decrease/(Increase) in trade and other receivables		230,677	(1,210,012)
(Decrease)/Increase in trade and other payables		(122,152)	125,638
Cash generated from operations		11,577,149	12,417,922
Interest received		62,875	28,258
Taxation (paid)/received		(3,928,729)	(2,819,116)
Net cash generated from operating activities		7,711,295	9,627,064
Cash flow from investing activities
Purchase of property and equipment		(400,163)	(181,533)
Proceeds from sale of property and equipment		320	-
Purchase of  non-current financial assets		(6,491)	(608)
Proceeds of non-current financial assets		483,434	-
Purchase of current financial assets		(2,132,613)	(2,307,698)
Proceeds from sale of current financial assets		178,438	560,204
Net cash (used)/generated from investing activities		(1,877,075)	(1,929,635)
Cash flow from financing activities
Proceeds from issue of ordinary shares		5,200	343,313
Ordinary dividends paid		(6,052,068)	(5,786,600)
Purchase of own shares by employee share option trust		(513,576)	(1,526,831)
Proceeds from sale of own shares by employee share option trust		136,632	414,431
Net cash used in financing activities		(6,423,812)	(6,555,687)
Net (decrease)/increase in cash and cash equivalents		(589,592)	1,141,742
Cash and cash equivalents at start of period		6,104,673	4,774,473
Effect of exchange rate changes		(115,212)	188,458
Cash and cash equivalents at end of period		5,399,869	6,104,673

Notes

For the year ended 31st May 2012

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 2012 and 31^st May 2011 does not constitute statutory accounts and has been extracted from the full accounts for the years ended 31^st May 2012 and 31^st May 2011.  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 2011 have been filed with the Registrar of Companies.  The accounts for the year ended 31^st May 2012 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 ("EU") and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The Group financial statements have been prepared under the historical cost convention, except for certain financial assets held by the Group that are reported at fair value.  The Group 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, as adopted by the EU, which are relevant to the Group, were in issue but not yet effective:

IFRS 7 Financial instruments: disclosures - Amendments effective for annual periods beginning on or after 1st July 2011 comprise additional disclosures on transfer transactions of financial assets, including possible effects of any risks that may remain with the transferor of the assets. Additional disclosures are also required if a disproportionate number of transfer transactions are undertaken around the end of a reporting period. The adoption of the amendments is not expected to have a material impact on the Group's financial statements.

At 31st May 2012 there are a number of other Standards and Interpretations, and revisions to existing Standards and Interpretations, including the 2010 improvements project, in issue but not in force or adopted by the EU and so these have not been disclosed.

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.

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).

3. Significant accounting policies

The principal accounting policies adopted are set out below and have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. In addition, where presentational changes are made in the current 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 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. As shown in note 12.

(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.

(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.   Segmental analysis

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

	USA	Canada	UK	Europe (ex-UK)	Other	Total
	£	£	£	£	£	£
Year to 31st May 2012
Revenue	29,050,781	654,182	2,680,574	1,757,169	-	34,142,706
Non-current assets:
Property and equipment	389,771	-	191,794	-	25,872	607,437
Intangible assets	352,319	-	-	-	-	352,319
Year to 31st May 2011
Revenue	29,968,449	1,708,514	2,618,857	2,198,343	-	36,494,163
Non-current assets:
Property and equipment	265,802	-	193,824	-	84,122	543,748
Intangible assets	363,684	-	-	-	-	363,684

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.

5.   Operating profit

	2012	2011
The operating profit is arrived at after charging/(crediting):	£	£
Depreciation of owned assets	336,226	325,442
Amortisation of intangible assets	11,365	45,460
Auditors' remuneration:
-  Reporting accountants on move to main market	-	85,000
- Statutory audit	65,470	57,761
- Taxation services	18,123	15,488
- Other services	7,211	9,763
Operating lease rentals:
- Land and buildings	349,858	386,168
Foreign exchange losses/(gains)	25,091	(10,366)
(Profit) on disposal of fixed assets	(72)	-

6.   Interest receivable and similar gains

	2012	2011
	£	£
Interest on bank deposit	62,875	28,258
Gain on sale of investments	364,795	94,064
	427,670	122,322

7.   Reversal of Impairment of seed investments

There was no impairment recognised during the year (2011: £79,372 write back of impairment).

 

8.   Tax charge on profit on ordinary activities

(a) Analysis of tax charge on ordinary activities:

	2012	2011
	£	£
Tax at 26% (2011 - 28%) based on the profit for the year	3,074,714	3,859,859
Double taxation relief	(1,656,439)	(1,971,573)
Deferred tax	(68,780)	(24,889)
Change in tax rate to 24% (2011: change in tax rate to 26%)	(18,097)	(19,830)
Adjustments in respect of prior years	(270,210)	4,791
Domestic tax total	1,061,188	1,848,358
Foreign tax for the current period	2,137,395	2,825,634
Adjustments in respect of prior years	(234,923)	(293,788)
Foreign tax total	1,902,472	2,531,846
Total tax charge in income statement	2,963,660	4,380,204

(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 - 26% (prior year - 28%).  The differences are explained below:

	2012	2011
	£	£
Profit on ordinary activities before tax	11,461,514	13,149,527
Tax at 26% (2011 - 28%) thereon	(2,979,994)	(3,681,868)
Effects of:
Unrelieved overseas tax	(480,956)	(854,061)
Expenses not deductible for tax purposes	(45,870)	(159,044)
Capital allowances less than depreciation	(50,886)	(57,754)
Prior period adjustments	505,133	288,997
Deferred tax	68,780	24,889
Impairment in seed investments not tax deductible	-	22,224
Change in tax rate to 24% (2011: change in tax rate to 26%)	18,097	19,830
Other	2,036	16,583
Total tax charge in income statement	(2,963,660)	(4,380,204)

On 21st March 2012 the Chancellor announced a reduction in the main rate of UK corporation tax to 24% with effect from 1st April 2012. The effect of the rate reduction has been reflected in the figures above.

9.   Earnings per share

The calculation of earnings per share is based on the profit for the period of £8,497,854 (2011: £8,769,323) divided by the weighted average number of ordinary shares in issue for the year ended 31st May 2012 of 25,171,389 (2011: 24,998,168).

The Employee Benefit Trust held 1,711,867 ordinary shares in the Company as at 31st May 2012. 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 £8,497,854 (2011: £8,769,323) divided by the diluted weighted average of ordinary shares for the year ended 31st May 2012 of 25,917,327 (2011: 25,818,990).

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

	2012	2011
	Number of shares	Number of shares
Weighted average number of shares - basic earnings per share	25,171,389	24,998,168
Effect of dilutive potential shares - share options	745,938	820,822
Weighted average number of shares - diluted earnings per share	25,917,327	25,818,990

10. Share capital

	2012 No. of shares	2011 No. of shares
Authorised
Ordinary shares of 1p each (2011 - 1p each)	90,000,000	90,000,000
	£	£
Ordinary shares of 1p each (2011 - 1p each)	90,000	90,000
	2012	2011
	£	£
Allotted, called up and fully paid
At start of year 26,858,450 (2011: 25,968,803) Ordinary shares of 1p each	268,584	259,688
Dilutive share options exercised; 20,000(2011:889,647)	200	8,896
At end of year 26,878,450 (2011:26,858,450) Ordinary shares of 1p each	268,784	268,584

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

11. Dividends

	2012	2011
	£	£
Dividends paid:
Interim dividend of 8p per share (2011 - 8p)	2,010,607	2,046,663
Final dividend in respect of year ended:
31st May 2011 of 16p per share (2010 - 15p)	4,041,461	3,739,937
	6,052,068	5,786,600

A final dividend of 16p per share has been proposed, payable on 19th October 2012, subject to shareholder approval, to shareholders who are on the register of members on 5th October 2012.

12. 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 2012 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	-	-	31,354	31,354
Trade and other receivables	5,345,334	-	-	5,345,334
Available-for-sale financial assets	-	-	6,924,552	6,924,552
Cash and cash equivalents	5,399,869	-	-	5,399,869
Total	10,745,203	-	6,955,906	17,701,109

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		264,859	3,626,408		3,891,267
Total		264,859	3,626,408		3,891,267
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

(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 2012	Level 1 £	Level 2 £	Level 3 £	Total £
Available-for-sale financial assets
Investment in own funds	2,319,341	4,636,565	-	6,955,906
Total	2,319,341	4,636,565	-	6,955,906
Financial liabilities at fair value through profit or loss
Forward currency trades	-	264,859	-	264.859
Total	-	264,859	-	264.859

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

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

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

Where there is an impairment in the investment in own funds the loss is reported in the income statement. No impairment was recognised during the year (2011:£79.372 write back of impairment).

The fair value loss on the forward currency trades is offset in the income statement by the foreign exchange gains on other currency assets and liabilities held during the year and at year end.  The net loss reported for the year is £25,091 (2011: net gain £10,366).

(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 2012, the Group had a net asset balance of US$12,792,210 (2011: US$11,694,999), offset by forward sales totalling US$11,750,000 (2011: US$13,500,000), plus net asset balances of SGD227,728 (2011: SGD1,051,314), C$157,387 (2011:C$401,876), EUR67,218 (2011:nil) and AED95,217 (2011:AED166,997).

Had the US Dollar strengthened or weakened against Sterling as at 31st May 2012 by 10%, with all other variables held constant, there would have been less than 0.5% increase or decrease (respectively) to 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.

 (iv) Market risk

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

Further details on the effects of the Group's post-tax profits due to movements in market prices have been demonstrated in the Financial review above.

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

The cost of hedging recognised in the Group income statement for the period is £71,575 (2011:£62,682).

(v) Credit risk

The majority of debtors relate to management fees due from funds and segregated account holders. As such the Group is able to assess the credit risk of these debtors as minimal. For other debtors a credit evaluation is undertaken on a case by case basis.

The Group has zero experience of bad or overdue debts.

The majority of cash and cash equivalents held by the Group are with leading UK banks. The credit risk is managed by carrying out regular reviews of each institution's credit rating and of their published financial position. Given their high credit ratings, management does not expect any counterparty to fail to meet its obligations.

(vi) Liquidity risk

The Group's liquidity risk is minimal because commission payable forms the major part of trade creditors and payment is made only upon receipt of the related fee income plus the Group's strategy is to maximise its cash position. In addition, the Group's current available-for-sale assets represent investments in funds that it manages and can be liquidated immediately if required.

(vii) Interest rate risk

The Group has no borrowings, and therefore has no exposure to interest rate risk other than that which attaches to its interest earning cash balances and forward currency contracts. The Group's strategy is so maximise the amount of cash which is maintained in interest bearing accounts, and to ensure that those accounts attract a competitive interest rate. At 31st May 2012, the Group held £5,399,869 (2011: £6,104,673) in cash balances, of which £4,534,050 (2011:£5,514,198) was held in bank accounts which attract variable interest rates. The effect of a 100 basis points increase/decrease in interest rates on the Group's net assets would not be material.

(viii) Capital risk management

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

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

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