City Of London Investment Group PLC - Coursework Example

of London Investment Group PLC strategic and financial analysis of the of the of the supervisor date City of London Investment Group PLC strategic and financial analysis Summary As an asset manager, city of London investment group deals with the investment of closed end fund for its institutional clients. Several years ago, it has extended its portfolio to include strategies of frontier and developed closed-end funds and providing equity for natural resource and emerging market. The paper discusses the strategic steps of the company and these are natural resource strategy, EM-Closed end funds strategy, developed closed end strategy, human resource strategy, and frontier market funds strategy. On the accounting analysis, the paper highlights that one of the responsibility of directors of the company is to prepare financial statements that present true and fair view. Under the accounting analysis, the analysis of the consolidated financial statement for year ended 31st may, 2013 is shown highlighting the balance sheet and profit and loss account. Further, it shows the effect of currency exposure on the financial statements. In order to evaluate the performance of the business, ratio analysis has been shown. The main ratios that truly reflect the performance of the business are profitability ratios, liquidity ratio, Solvency ratio, efficiency ratios, and dividend policy ratios. To analyze the Fundamental value of the equity capital of the company, P/E ratio, cash based evaluation model and asset based evaluation model have been applied. The most effective model is the cash based evaluation model that analyses the future prospects of the cash flow of the business. The paper recommends increase of investment in many countries especially in Africa to realize the natural resource strategy and use of cash based evaluation model to determine future cash flow and assist in making investment decisions. Strategic and accounting analysis Strategic analysis The main strategies adopted by the company are natural resource strategy, EM-Closed end funds strategy, developed closed end strategy, human resource strategy, and frontier market funds strategy. Natural resources strategy is an important strategy of the organization. This strategy is geared toward attaining a long term capital growth by investing in corporations that get a large proportion of the profits from exploring, producing and offering services and technologies that are related to natural resources. The process of investment is fully integrated including bottom up, top down and thematic approaches. The process that involves the allocation of assets evaluates sector –specific, political and economic factors by using several sources of information including the company’s economists. Basing on non the satellite and core approach, the selection of stock is carried out through rigorous fundamental analysis whose horizon of return time is 12 to 18 months. Thematic analysis facilitates both stock selection and asset allocation elements of the process and assists the manager to exploit the wide range of opportunities in the natural resources sector while simultaneously realizing a diverse portfolio. The Emerging market closed- End funds strategy strives to offer a long term growth of capital through active country allocation and stock selection. The company believes that the closed-end fund provides an effective modality of investing in the emerging markets. The strategy assists in identifying and specializing in price anomalies and discount movements to offer an above average long term outperformance against the set benchmark while at the same time retaining minimal threshold of volatility compared to the benchmark(Bodie &Merton,2000). The developed Closed-End fund strategy strives to provide effective way of investing in international or global equity market. The frontier closed edge fund strategy strives to provide ways of investing in frontier markets. Human resource strategy is great. It entails recruiting highly professional and talented professionals especially economists and investment analysts. It also engages in its own training to impart the staff with the knowledge of its values and objectives. Competition strategy entails using its philosophy and approach in generating continuous performance in investment throughout the economic cycles. The organization utilizes technology to unleash their capabilities thus enabling it to trade worldwide basing on real information that pertain investment portfolio. The process driven approach of investment is applicable to markets unlike the conventional emerging markets closed funds. The company manages costs and profit margin to be able to offer shareholder with significant dividends and capital growth while the employees are provided with reasonable and appropriate remunerations (Peterson &Fabozzi,2012). Accounting Analysis The preparation of financial statements and annual report is a responsibility of the directors. This is in compliance with rules and regulations. Company laws in UK and other countries in the world require the directors to prepare company and group’s financial statement in compliance with IFRS (International financial reporting standards which has been adopted by European Union. Under the company law, directors can only approve financial statements that give fair and true view. Further, the financial statements are usually prepared on going on concern basis (Bodie &Merton,2000). The company has an effective internal control system. These include compliance, operational and financial controls. Each internal control function is subject to a quarterly review by the company’s senior management team, which is mandated to report and identify key controls in line with their responsibility. One important aspect to be noted is that due to the size of the company, internal audit function was removed (Lofthouse,2001). Analysis of the consolidated financial statement for year ended 31st may, 2013 The presentation of the group’s financial statement is in accord with the international accounting standards. This analysis will consider the most important aspects that are related to investment and financial analysis. In 2013, the investment income was £0.4 million, which was similar to the figure posted in 2012.Investment income related to the gain on the number of seed investments sold of which 60% emanated from partial redemptions while the balance was a result of closure of funds brought about by the rationalization of equity products (City of London Investment Group PLC,2013). The post tax profit was £6.3 million and was adjusted to a total of £6.6 million due to increase by £0.3 million. The adjustment was a result of the valuation of seed investment that resulted in £0.5 million less £0.2 million that was gain on disposal (City of London Investment Group PLC,2013). The net assets have remained stable posting £14.6 million although there have been significant movement in a number of components. The trade receivables were down to £3.5 million due to prompt settlement of the fees in the first quarter. Creditors falling due within the period of one year dropped by £0.5 million because of the reduction in the provision of profit share and £0.4 million reduction in commission payable(City of London Investment Group PLC,2013). Currency exposure As an international investment firm, the movement of the sterling pound against the US dollar has a tremendous influence on the reported group results. The income is dominated by the dollars while the expense is incurred in sterling pound. The minimal fluctuation, the forward sales was US$10.9 million(City of London Investment Group PLC,2013). Financial performance basing on ratio analysis A sustainable mission and business requires effective financial planning and management. Ratio analysis is a vital tool used to enhance the understanding of financial trends and results over time. The ratio analysis is a vital indicator that the investor can use to determine the value of an organization. In ratio analysis, the vital ratios are profitability ratios, liquidity ratio, Solvency ratio, efficiency ratios, and dividend policy ratios(Lofthouse,2001). Net profit margin ratio=profit before taxation/revenue which is 8,860,117/ 29,363,734=0.3.This shows that 30% of the revenue still remains even after making deduction of all expenses. The figure is high indicating that the company is profitable. Return on investment=net profit/owner equity which is 8,860,117/14,630,036 which is 0.61.This indicates that the business is efficient and has generated a profit from the original investment by more than 50%(Avadhani,2011). Current ratio=Current assets/current liability which is 17,447,437/ 3,802,327=4.6.This figure is greater than 1 which shows that the organization has more cash to cover its short term debts. However, it has not reached the industrial threshold of 6.3, which clearly shows that it needs to consider strategies that enhance its liquidity(Lofthouse,2001). Debt to equity ratio=Total liabilities/Total equity which is 3221390/14,630,036 which is 0.22.The ratio is relatively low indicating that the business has a low risk to lenders(Lofthouse,2001). Basing on the specified ratio, the company is in a good financial position worth investing in. Further, its solvency standing shows that is a less risky venture in which investors should consider investing their financial resources. The profitability ratio shows that it is a profitable organization hence investor’s venture capital can easily grow when invested in the organization(Swee-Hock,2004). Fundamental value of the equity capital of the company Analysis USING P/E ratio P/E or price to earning ratio can be defined as the share’s market price divided by the yearly earning per share. When the city of London investment group is taken into account, the earning per share is based on the profit of the year ended 2013 of £6,266,442, which is divided by the number of ordinary shares amounting to 25,152,921 issued on the year ended 31st may 2013.. As set out by the director in the annual report’s in page 17,1,843,283 ordinary shares were held by employee benefit trust in the company. Basing on IAS 33, these ordinary shares that are held by employee benefit trust have not been included in the weighted average calculation of the ordinary shares. At the year ended 31st may,2013, the price of the company’s ordinary shares was £2.585.By the year ending may 31,2013, earning per share was 24.90 while the E/P ratio was 10.40.The E/P, which is relatively high has a large equity capital although it’s leverage may be high due to its core business of investment in a current volatile market structure(Lofthouse,2001). When a comparison is made between the share price and the earning per share, it is easier to analyze the company’s market stock valuation and its shares against the actual income that the company is generating. Stocks that have higher projected growth of earning usually post high P/E just as the case with London city investment group while those with low growth of earnings are risky and in most Cases have relatively low P/E.P/E depends highly on the structure of the capital. Debt taken(Leverage) taken by the company have a number of effects on share price and earning on a number of ways that include tax effects, effects of the risk of bankruptcy, and the leveraging of the rates of earning growth(Feibel & Vincent,2011). The main flaw of P/E is that unlike other metrics such as dividends and cash flow, the earnings may be manipulated at the company level thus defeating accountability and accurate analysis of the organizations value. Cash based Valuation model This is a valuation method used to establish the company’s value by utilizing adjusted cash flow for time value thus evaluating the potential for investment. If the value arrived at during the cash based valuation is higher than the current investment cost, just as one experienced by London city investment group, then the company is worth investing in. Although the calculation is complex, the aim of cash based evaluation model is to analyze the money one would get if one invests in a given company and to determine the time value of the money(Swee-Hock,2004). Although discounted cash flow models are vital tools for valuing the company, they have several shortcomings. They are merely tool for mechanical valuation, which make them easy to manipulate by the company using them. Minimal changes in the inputs may culminate into large changes in the company’s value. Terminal value techniques may be used in cases where the cash flows to infinity. For instance, simple annuity is applied to determine the terminal value past ten years. This is usually done because it is difficult to get actual estimates as time goes by(Feibel & Vincent,2011). Asset based valuation model This is a business valuation in which the total liabilities are subtracted from the net asset. Basically, this model seeks to ask the cost that would be incurred to recreate the business. London city investment groups’ total asset in the year ended may 31, 2013 is 17,447,437 while the total liabilities is 3,892,794.Thus the figure of asset based valuation model is 14,630,036. Under this model, the book value of all liabilities and assets are reviewed and where necessary, adjustments are made to mirror the realizable and actual values. Items that may require adjustments are start up cost to realize the actual values(Peterson &Fabozzi,2012). Whilst the asset based valuation may appear relatively simple, it is easy to get wrong figure or misunderstand it. Proper use of this method requires a mastery of calculation such as measurement and recognition of assets for financial reporting purposes that reflect dynamics of markets, effects of inflation, the role of replacement cost, the competitiveness of the organization and the real economic cost of assets(Trahan &Groslambert,2003). Asset based valuation has several disadvantages. First, there may be understatement or overstatement of intangible assets such as goodwill, which the company can do at their own disposition and thus the real figures may not be reflected. The valuation model ignores future changes either upward or downward of income and expenses. In some cases, the balance sheet may not reflect all assets and liability thus compromising the figures accuracy (Avadhani,2011). Recommendation With the complexity of the global economy and the need to create much wealth, asset management has become an important part of the global business environment. City of London Investment Group has been able to achieve this through a number of strategies that include natural resource strategy, EM-Closed end funds strategy, developed closed end strategy, human resource strategy, and frontier market funds strategy. One of the recommendations is enhancing its growth strategy. Since the organization is an investment manager, it should increase its branches in many countries especially in Africa where the economy has started to grow and still has many deposits of natural resources. As such, it can assist in offering its expertise in investment hence enhance its earnings and profitability. The best valuation method that the company should adopt is the cash based evaluation model, which entail the value of the company to generate cash in future. Cash is the basis of any business and so its management is imperative for tremendous growth. Further, the aIm of the business is to grow in future and so analysis of possible future cash flow is imperative for any investment decision. References AVADHANI, V. A. (2010). Investment management. Mumbai, Himalaya Pub. House. http://site.ebrary.com/id/10415630. Swee-Hock, S.(2004). Investment Management. Singapore: Pearson Prentice Hall. LOFTHOUSE, S. (2001). Investment management. Chichester, West Sussex, England, Wiley. FEIBEL, B. J., & VINCENT, K. D. (2011). Complying with the global investment performance standards (GIPS). Hoboken, N.J., Wiley. http://www.books24x7.com/marc.asp?bookid=43179. TRAHAN, F., & KRANTZ, K. (2011). The era of uncertainty global investment strategies for inflation, deflation, and the middle ground. Hoboken, N.J., Wiley. http://site.ebrary.com/id/10488498. BOUCHET, M. H., CLARK, E., & GROSLAMBERT, B. (2003). Country risk assessment: a guide to global investment strategy. Hoboken, NJ, J. Wiley. PETERSON, P. P., & FABOZZI, F. J. (2012). Analysis of Financial Statements. Hoboken, John Wiley & Sons. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=948807. DYSON, R. G., & OBRIEN, F. A. (1998). Strategic development methods and models. Chichester, England, Wiley. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=17808. BODIE, Z., & MERTON, R. C. (2000). Finance. Upper Saddle River, NJ, Prentice Hall. City of London Investment Group PLC.(2013).Annual account and report.pdf. Read More