City of London Investment Group (LSE: CLIG) profit rises 25% despite $1.3bn outflows

City of London Investment Group PLC (LSE: CLIG) delivered higher profits, assets and dividends in FY26 despite one number that would normally trouble an asset manager: net client outflows reached approximately US$1.3 billion. Funds under management nevertheless increased 13.9% to US$12.3 billion because market performance and investment returns more than offset withdrawals, while profit before tax climbed 24.8% to US$32.4 million. Net fee income increased 9.7% to US$76.5 million and the operating margin expanded to 39.5% from 34.6%.

CLIG shares were around 490p during the September 15 session, up approximately 1.7% and just below their 52-week high of 496p. At that level the group carried a market value of roughly £242 million, while the trailing dividend information already implied a yield above 6% before incorporating the proposed increase in the final distribution.

How did City of London Investment Group grow assets despite $1.3 billion of outflows?

Investment performance and rising markets did the heavy lifting. Funds under management increased from US$10.8 billion to US$12.3 billion even though gross outflows exceeded inflows, because market and investment performance added approximately US$2.8 billion during the year. The largest net withdrawals occurred in Emerging Markets, where outflows reached US$872 million, and International Equity, where net redemptions were US$214 million.

This creates an important distinction between asset growth and organic asset gathering. Higher markets increase fee-paying assets and can boost earnings even when clients are withdrawing capital, but that growth is less durable if markets subsequently reverse. Asset managers generally receive higher valuation multiples when they demonstrate both strong investment performance and sustained positive net flows.

City of London Investment Group did show improvement during the second half. Net outflows slowed compared with H1, while the group continued marketing across active equity and fixed-income strategies. The next step is converting stronger performance into enough new mandates to make future funds-under-management growth less dependent on market appreciation.

Why did CLIG profitability improve faster than fee income?

Net fee income rose 9.7%, while operating profit increased 25.2% to US$30.2 million. That pushed the operating margin from 34.6% to 39.5%, demonstrating substantial operating leverage as higher fee revenue flowed through a comparatively controlled cost base. Underlying profit before tax increased 19.3% to US$36.8 million.

Basic earnings per share increased 19.4% to 36.9p, while underlying EPS rose 14.2% to 41.9p. Those gains are important for an income-oriented shareholder base because dividend sustainability ultimately depends on earnings and cash rather than funds under management alone.

The group also remains highly liquid. Cash and cash equivalents increased to approximately US$42.0 million from US$35.5 million, creating flexibility to support dividends and invest in product development or inorganic opportunities. That balance-sheet strength helps distinguish CLIG from asset managers whose dividends require leverage or aggressive payout assumptions.

What does City of London Investment Group’s new dividend policy mean for shareholders?

The board is recommending a 23p final dividend, up from 22p, taking the full-year distribution to 34p per share compared with 33p previously. More importantly, the company is changing its dividend framework from targeting 1.2 times cover over a rolling five-year period to a progressive dividend policy intended to grow distributions alongside sustainable underlying earnings.

At a 490p share price, a 34p annual dividend corresponds to a prospective-looking reference yield of roughly 6.9% if the proposed distribution is approved and assuming the same annual amount as the basis for the calculation. That is not a guarantee of future yield because both dividends and share prices can change, but it explains why income remains central to CLIG’s investor appeal.

The policy change gives management greater flexibility. It can increase dividends when earnings support them without being mechanically constrained by a rolling coverage formula, while retaining capital for growth initiatives. Investors will nevertheless expect discipline because progressive dividend policies become difficult to defend if asset outflows eventually weaken earnings.

Are the $1.3 billion outflows the biggest risk to the CLIG investment case?

They are arguably the clearest operational risk. Market appreciation can conceal outflows for a period, but sustained redemptions eventually reduce fee income if investment gains slow. The emerging-markets franchise remains particularly important because it accounts for a large portion of funds under management and experienced the majority of FY26 withdrawals.

The counterargument is that investment performance has been strong enough to produce substantial asset growth and improved profitability even during a difficult flow environment. Management believes continued sales activity and client engagement can turn renewed investor interest into more sustainable growth as market conditions stabilise. That possibility becomes more credible if the second-half moderation in redemptions continues into FY27.

The share price sitting close to its annual high suggests investors currently give considerable weight to earnings, dividend yield and market performance rather than treating outflows as an immediate structural problem. The next phase will reveal whether that confidence is justified. CLIG has already demonstrated it can grow profits while losing net client assets; the more valuable achievement would be growing profits while turning those flows positive.