Annual Financial Report

RNS Number : 0021A

BMO UK High Income Trust PLC

23 May 2019

 

To:                   RNS

From:               BMO UK High Income Trust PLC

Date:                23 May 2019

LEI:                  213800B7D5D7RVZZPV45

Statement of Audited Results for the year ended 31 March 2019

·      Distribution yield ⁽¹⁾ of 5.3 per cent on Ordinary shares and B shares at 31 March 2019, compared to the yield on the FTSE All-Share Index of 4.2 per cent. Total distributions increased by 3.3% to 5.04p per share compared to the prior year.

·      Ordinary share price total return ⁽¹⁾ per share for the year was 3.7 per cent, compared to the Benchmark ⁽²⁾ total return of 6.0 per cent.

·      B share price total return per share for the year was 4.5 per cent, compared to the Benchmark total return of 6.0 per cent.

·      Net asset value total return per share for the year was 3.5 per cent, compared to the Benchmark total return of 6.0 per cent.

(1)   Yield and Total return - See Alternative Performance Measures

(2)   Benchmark - From launch on 1 March 2007, the Company's benchmark index was the FTSE All-Share Capped 5% Index.  Following shareholder approval at the Company's AGM on 5 July 2018, the benchmark was changed to the FTSE All-Share Index.

Chairman's Statement as follows:

Over the financial year, the Board has continued to focus on the delivery of the changes which have been implemented since 2017 and the Company has engaged with our shareholders on our new focused strategy. We feel confident that the changes will deliver an attractive, relevant, and ultimately differentiated income strategy for our shareholders over the long term. We are aware that delivery takes time and that the Manager needs to build a longer-term track record with this more concentrated strategy, but we now have the constituents in place.

Performance

UK equity markets delivered a positive return over the Company's financial year although this was coupled with considerable volatility. This volatility was most visible in the fourth quarter of 2018, when investors reacted to the weakening global economic backdrop by 'panic' selling. The FTSE All-Share fell by more than 10% in the quarter as we saw a sharp derating of the market. The Manager felt the reaction was overdone and took the opportunity to add to some of our existing holdings at what subsequently proved to be very attractive valuations. His assessment of opportunity was not based on sentiment or noise but on the fundamentals of the companies in question and reflects the considerable analysis and in depth research that has been undertaken on the Company's holdings.

For the Company's financial year ended 31 March 2019, the Net Asset Value ("NAV") total return for the Ordinary shares and the B shares was 3.5% compared to the total return of the Company's benchmark of 6.0%. The share price total return for the Ordinary shares and B shares was 3.7% and 4.5% respectively for the financial year, the latter reflecting a slight decrease in the discount to NAV over the year.

Whilst the performance is behind the benchmark during this period of transition, we are confident that the changes being made will deliver over the longer term. The Manager has been clear that he wants to move away from the traditional mega-cap income model of owning the top 10 index constituents, which he describes in more detail in the Manager's Review. This is a challenging transition to make, especially given the uncertainty in markets and the fact that these larger businesses are often deemed safe-haven assets in periods of heightened volatility. In tandem with these sales, he has rotated into areas that are under-owned or under-researched, but where he sees significant value on offer over the longer term.

The principal contributors to the performance and additional information is covered in more detail in the Manager's Review.

Environmental, Social and Governance ("ESG") approach

The Company's Manager applies the highest standards of ESG practice in managing the Company's investments and more information on this approach and insight into engagement during the year is included in the Annual Report and Financial Statements. BMO GAM is a signatory to the United Nations Principles for Responsible Investment ("UNPRI") under which signatories contribute to the development of a more sustainable global financial system and is A+ rated.

Earnings, Dividends and Capital Repayments

The Company's revenue earnings per share decreased over the year to 3.77p (2018: 4.03p). As explained in the accompanying Manager's Review this is primarily a function of a change in style as it was felt that the portfolio was top-heavy with too many high dividend yielders, but minimal growth prospects. The Manager has now repositioned the portfolio resulting in a better balance between capital and dividends over the longer term. This has not altered our ethos: to pay a high and growing dividend or the Board's commitment to a progressive dividend policy. This year's total annual dividend was fully covered by net revenue.

Movements in the Sterling exchange rate, most notably against the US dollar, have an important influence on the Company's revenue as broadly a quarter of the Company's income comes from UK-listed companies that declare dividends in US dollars. Over the past year Sterling has weakened against the US dollar by approximately 7% which has benefitted the level of dividend income.

The total dividend/capital repayment in respect of the year ended 31 March 2019 amounted to 5.04p per share, an increase of 3.3% on the previous year and ahead of the 1.9% increase in the Consumer Price Index. For each of the first three quarters, the interim dividends paid on the Ordinary shares and capital repayments on the B shares were 1.25p per share. A fourth quarter interim dividend and a capital repayment of 1.29p per share was paid to Ordinary shareholders and B shareholders respectively, after the year end, on 3 May 2019.

We have now steadily increased the annual total dividend/capital repayment in each of the last seven financial years while adding to the revenue reserve. After accounting for the fourth quarter dividend, (which was paid after the year-end), a small transfer to the revenue reserve (from current year net income) was possible, resulting in a revenue reserve of £5.3m. This is equivalent to approximately 122% of the current annual dividend cost. This revenue reserve affords the Company the ability to sustain the level of dividend payments if a more difficult environment develops.

The total dividend/capital repayment for the year represents a yield of 5.3% on both the Ordinary share and B share year end prices, a premium of around 26% to the 4.2% yield from the Company's benchmark at that date.

Borrowing

The Company has a £7.5 million term loan at a fixed interest rate of 2.58% per annum and an unsecured revolving credit facility for £7.5 million both of which are committed to the Company until 28 September 2022. This dual structure gives us both fixed structural gearing and flexibility to use the revolving facility when we feel it is appropriate.

The Company's gearing policy and related limits are set out in the Annual Report and Financial Statements and at the time of writing, borrowings total approximately 6.0% of gross assets.

Discount and buy backs

At the financial year end, the Company's Ordinary share price and B share price stood at a discount to net asset value of 7.2%. The average discount level at which the Company's Ordinary shares and B shares traded relative to net asset value in the year was 7.2% and 6.9% respectively.

During the year, the Company bought back 600,000 Ordinary shares, representing 0.7% of the Ordinary shares, in issue at the previous year end. The shares were bought back in line with the Company's stated policy, which helps to reduce the volatility of the discount. The price paid for these Ordinary shares represented a discount of approximately 9.8% to the prevailing net asset value at the time of purchase.

Name change

On 9 November 2018, it was announced that it had been decided to change the Company's name to BMO UK High Income Trust PLC. The Company's Manager, F&C Investment Business Limited, became part of the BMO Financial Group in 2014. BMO was founded over 200 years ago as Bank of Montreal and is now the eighth largest bank by assets in North America. As part of its development plans, BMO decided to rebrand F&C's savings plans to the BMO prefix. Many of the Company's shareholders invest through the F&C savings plans and with the F&C brand changing your Board therefore resolved that continuing to align with the brand of its Manager, as well as the savings plans, would avoid unnecessary confusion and ensure the Company maximises the benefits resulting from broader brand investment by BMO. The Fund Manager, investment policy and process remain unchanged.

Cost efficiency and Manager fee

One of our Key Performance Indicators is cost efficiency and we monitor costs closely and strive to keep our ongoing charges as competitive as possible. As we reported last year, with effect from 1 April 2018 the investment management fee was reduced from 0.75% to 0.65% per annum on the net asset value which has helped to keep our ongoing charges below 1%.

Board Changes

I have served on the Board since March 2009 and as Chair since January 2011 and will retire following the conclusion of the Annual General Meeting on 9 July 2019. I am pleased to report that the Board intends to appoint John Evans to succeed me as Chair. John has over 30 years' experience in the investment management industry and of investment trusts and he has made a significant contribution to the Company since he joined the Board in May 2013.

The Nomination Committee is currently undertaking a recruitment process with a view to appointing another non-executive director in the near future. We will always appoint the best person for the job and the policy on Board diversity is set out in the Annual Report and Financial Statements.

Annual General Meeting ("AGM")

The AGM will be held at 12 noon on 9 July 2019 in the offices of BMO Global Asset Management, Exchange House, Primrose Street, London, EC2A 2NY. It will be followed by a presentation from our Fund Manager Philip Webster. This is a good opportunity for shareholders to meet the Board and the Fund Manager and I would encourage you to attend.

Outlook

Whilst the short-term performance since we implemented the recent strategy changes has been behind the benchmark, the Board and I feel strongly that this was the right course of action and I believe that I am leaving this Company well placed to deliver its objective over the next investment cycle. Looking forward, the environment is likely to remain volatile against the backdrop of Brexit, which the Manager covers in his review. We have considered the implications of this for the Company and regardless of how Brexit finally materialises we do not consider that it will have a significant impact on the operations of the Company. We remain confident that the steps taken to provide shareholders with a truly active, high income-generating product, leaves the new Chair and Board in the best possible position to continue to deliver value for our shareholders.

Iain McLaren

Chairman

22 May 2019

Manager's Review

Strategy update

In the March 2018 Annual Report, I spoke at length about the Company's new strategy to deliver a differentiated and relevant income product for the future. If you want a reminder, please refer to it as this strategy change is fundamental to the Company's objective.

The financial year to 31 March 2019 was more evolution than revolution, with the major strategy changes having already been implemented in late 2017. My focus since, has therefore been on execution and refining the shape of the portfolio to a high conviction, high income product that can provide a more balanced approach between capital and income over the medium-term.

To put these changes in context, during the financial year to 31 March 2018, I initiated 14 new positions and exited 33. Over this financial year to 31 March 2019, I have added a further 3 new names and exited 4, which hopefully gives you an understanding of the comfort level I have in the portfolio today.

The portfolio had been concentrated down to 35 holdings and it is broadly around that level today. I don't expect the number of holdings to vary materially as I believe that at this level I can drive real 'informational advantage' in the holdings owned through our rigorous due diligence process. As a team, we seek to remove the short-term noise in markets over the next quarter's results delving into the qualities of the business model and how they drive their sustainable competitive advantage. This is the determining factor that gives me the comfort to run larger weights and provides confidence that over the medium-term these are the business models that will deliver shareholder value.

This clarification of the changes to the portfolio is intended to give transparency on how and why we have made these changes and is not an excuse for the short-term underperformance. The underperformance has been driven by several factors including our contrarian style, stock-selection and being underweight the larger index constituents. The concentrated nature of the portfolio means that over the short-term we will disconnect from the benchmark especially through periods of heightened volatility. We have, however, seen performance improve towards the year-end and with the noise around Brexit subsiding we have subsequently seen the portfolio begin to outperform.

Brexit

Predicting the outcome or the longer-term implications of Brexit on the UK market is a futile exercise. What we do know is that it has been a challenging time to be a UK investor, although, as is often the case, the 'fear' has provided opportunities to own quality UK businesses at attractive valuations. Brexit may be deemed by some to be severely negative for the UK, but it is a known event and valuations already reflect a lot of the concerns.

Stepping back from the noise and political wrangling, plans are being implemented at the portfolio level, or are already in place, to deal with the potential fallout. I cannot say that some of my positions won't be affected, but I've bought into them with the understanding that there is a margin-of-safety in the valuation. That doesn't mean that they can't fall so I've also been diligent in making sure those that are most exposed to this risk have the appropriate balance sheets to weather some short-term upset to trading.

Relative positioning

The following table sets out the Company's top 10 relative weights (versus the benchmark index) and is the way I think about portfolio construction and the medium-term return potential. The first thing to note is the balancing of stable growth compounders (RELX, Kerry Group, Sage Group and Phoenix Holdings) combined with value (either out-of-favour or the cycle).

The value positions require patience or the cycle to turn. Close Brothers is a perfect example of a business that is around, or at its cyclical low in terms of earnings growth. History has, however, proven this to be a quality growth play when the cycle again turns in their favour. The second point of note is that out-of-favour holdings can also have exceptionally attractive yields. For example, Jupiter Fund Management, Lenzing and Brewin Dolphin all yielded 5% or more at the point of initiation.

	Relative Weight against the FTSE
Company	All-Share Index* (%)
Close Brothers Group	3.11
RELX	2.89
Kerry Group	2.57
Jupiter Fund Management	2.52
Sage Group	2.43
Lenzing	2.42
Phoenix Group Holdings	2.40
British American Tobacco	2.39
Brewin Dolphin	2.27
Intermediate Capital Group	2.26

* Illustrates the difference between the Company's position in individual holdings as compared to their weighting in the FTSE All-Share Index at 31 March 2019.

The final point to highlight is that these positions are a combination of strong stable compounders but also a considerable amount of value that will drive the medium-term returns. We are happy to be holding a contrarian stance given the disregard for valuation, especially when it comes to quality businesses. This is the reason we have exited Unilever and Diageo, both quality businesses, that were sizeable positions because we felt the valuations had reached a level where investors were overpaying. Overinflated valuations will always unravel in the longer term but over the shorter term, not owning some of these businesses will drag on performance.

From a sector perspective we are underweight the traditional mega-cap sectors; Oil & Gas, Healthcare and Basic Materials (Mining). We are overweight Financials, although within that we are very underweight Banks. Our overweight is driven by our exposure to the diversified financials, for example Brewin Dolphin and Intermediate Capital Group where we own businesses with a competitive advantage. We are overweight Consumer Goods & Consumer Services, which is currently a contrarian stance, but this is where we see value on offer.

Activity

As noted earlier, the level of trading has reduced significantly but we have taken advantage of weakness over the year to introduce three new holdings; Lenzing, Wizz Air and Jupiter Fund Management.

Lenzing is one of the few European names we have added to the portfolio. Lenzing are transitioning to a specialised manufacturer of niche sustainable fabrics for the fashion industry. These products are expensive and value-add for the garment manufacturers and give Lenzing the ability to brand and price appropriately. Their speciality businesses are growing in importance but in the short term, their viscose division, which is insignificant in profit terms, has driven the share price down towards new lows of €75. I have been using this weakness to build up the position size and at the time of writing we have seen a good rebound.

The second new addition to the portfolio is Wizz Air, the Eastern European low-cost airline. They are the market leader in their region with 39% market share and very strong positions in Poland, Romania, Hungary and Bulgaria. They are getting closer to the market leader, Ryanair, in terms of the cost per seat and have been driving considerable growth as they open new routes and add capacity to their existing network. Again, I used the weakness due to the rising oil price to initiate a position at what I felt was a very attractive valuation.

We initiated a position in Jupiter Fund Management post the recent sell-off, using proceeds from the reduction in HSBC. We see this as a significant quality upgrade into a franchise that has weakened with markets and fund-specific outflows rather than underlying fundamentals. They still face several challenges, but on a P/E multiple of 13x and yielding 6% (excluding the special dividend) the stock was already pricing in a lot of the challenges. They have a net cash balance sheet, so I would feel comfortable adding to the position should it weaken further.

Dividend

The transition of the portfolio has also improved the quality of the earnings, balance sheets and dividend cover. I wrote last year about skewing the portfolio more towards dividend growth, and away from some of the very high yielding, but low growth, mega-caps. This year has been similar as we have opportunistically made the relevant changes to upgrade the quality of the holdings and the sustainability of the dividends.

It is pleasing to see holdings like Cairn Homes transition from a 'ramp-up' stock to providing capital returns in a relatively short timeframe. Having paid no dividend last year, we expect them to return a significant amount of the cash-flow generated over the next 3 years, which would mean a yield of above 5%. Names such as these may be small contributors at the outset, but they will be meaningful over time in the dividend growth generated.

Outlook

As we approach the Brexit deadline I would expect volatility to increase and investors to seek solace in safe-haven assets. My focus has been improving the quality of the Company's holdings, balance sheets, cash-flow and ultimately dividend cover which will allow us to maintain the high yield and drive medium-term capital growth for our shareholders. I see significant value in the portfolio today caused by the current market backdrop which is an opportunity for the medium-term investor.

Philip Webster

Fund Manager

BMO Investment Business Limited

22 May 2019

 

Statement of Comprehensive Income (audited)

		Year to 31 March 2019
	Note	Revenue	Capital	Total
		£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value through profit or loss		-	462	462
Exchange gains		-	7	7
Revenue
Investment income		5,219	-	5,219
Total income		5,219	469	5,688
Expenditure
Investment management fee		(238)	(555)	(793)
Other expenses		(469)	-	(469)
Total expenditure		(707)	(555)	(1,262)
Profit/(loss) before finance costs and tax		4,512	(86)	4,426
Finance costs
Interest on bank loan		(61)	(143)	(204)
Total finance costs		(61)	(143)	(204)
Profit/(loss) before tax		4,451	(229)	4,222
Tax		-	-	-
Profit/(loss) for the year		4,451	(229)	4,222
Total comprehensive income/(expense) for the    year		4,451	(229)	4,222
Earnings per share	2	3.77p	(0.19)p	3.58p

The total column of this statement represents the Company's Income Statement and Statement of Comprehensive Income, prepared in accordance with the IFRS.  The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discounted in the year.

 

Statement of Comprehensive Income (audited)

		Year to 31 March 2018
	Note	Revenue	Capital	Total
		£'000	£'000	£'000
Capital losses on investments
Losses on investments held at fair value through profit or loss		-	(6,867)	(6,867)
Exchange losses		-	(17)	(17)
Revenue
Investment income		5,601	-	5,601
Total income		5,601	(6,884)	(1,283)
Expenditure
Investment management fee		(294)	(686)	(980)
Other expenses		(424)	-	(424)
Total expenditure		(718)	(686)	(1,404)
Profit/(loss) before finance costs and tax		4,883	(7,570)	(2,687)
Finance costs
Interest on bank loan		(119)	(277)	(396)
Total finance costs		(119)	(277)	(396)
Profit/(loss) before tax		4,764	(7,847)	(3,083)
Tax		-	-	-
Profit/(loss) for the year		4,764	(7,847)	(3,083)
Total comprehensive income/(expense) for the   year		4,764	(7,847)	(3,083)
Earnings per share	2	4.03p	(6.64)p	(2.61)p

The total column of this statement represents the Company's Income Statement and Statement of Comprehensive Income, prepared in accordance with the IFRS.  The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discounted in the year.

 

 Statement of Financial Position (audited)

as at 31 March

		2019		2018
		Note	£'000		£'000
Non-current assets
Investments held at fair value through profit or loss			125,259		127,664
Current assets
Receivables			1,696		1,179
Cash and cash equivalents			1,204		1,563
			2,900		2,742
Total assets			128,159		130,406
Current liabilities
Payables			(554)		(581)
			(554)		(581)
Non-current liabilities
Bank loan			(7,500)		(7,500)
			(7,500)		(7,500)
Total liabilities			(8,054)		(8,081)
Net assets			120,105		122,325
Share capital			134		134
Share premium			153		153
Capital redemption reserve			5		5
Buy back reserve			81,643		82,190
Special capital reserve			16,540		18,089
Capital reserves			15,197		15,426
Revenue reserve			6,433		6,328
Equity shareholders' funds			120,105		122,325
Net asset value per Ordinary share		6	102.39p		103.75p
Net asset value per B share		6	102.39p		103.75p

The Company's profit for 2019 was £4,222,000 (2018: loss £3,083,000).

Cash Flow Statement (audited)

for the year to 31 March

	Year to 31 March 2019	Year to 31 March 2018
	£'000	£'000
Cash flows from operating activities
Profit/(loss) before tax	4,222	(3,083)
Adjustments for:
(Gains)/losses on investments held at fair value through profit or loss	(462)	6,867
Exchange (gains)/losses	(7)	17
Interest income	(7)	(11)
Interest received	7	11
Investment interest	-	(63)
Investment interest received	-	125
Dividend income	(5,207)	(5,522)
Dividend income received	4,946	5,292
Decrease in receivables	2	4
Decrease in payables	(27)	(22)
Finance costs	204	396
Net cash inflow from operating activities	3,671	4,011
Cash flows from operating activities Purchases of investments Sales of investments	(28,927) 31,525	(69,296) 71,056
Net cash inflow from investing activities	2,598	1,760
Cash flows from financing activities
Bank loan repaid	-	(10,500)
Dividends paid on Ordinary	(4,346)	(4,220)
Capital returns paid on B shares	(1,549)	(1,500)
Interest on bank loan	(193)	(436)
Shares purchased for treasury	(547)	(521)
Net cash outflow from financing activities	(6,635)	(17,177)
Net decrease in cash and cash equivalents	(366)	(11,406)
Currency gains/(losses)	7	(13)
Opening net cash and cash equivalents	1,563	12,982
Closing net cash and cash equivalents	1,204	1,563

Statement of Changes in Equity (audited)

for the year to 31 March 2019

	Share Capital	Share Premium	Capital Redemption Reserve	Buy Back Reserve	Special Capital Reserve	Capital Reserve - Investments sold	Capital Reserve - Investments held	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 1 April 2018	134	153	5	82,190	18,089	(2,836)	18,262	6,328	122,325
Total comprehensive income/(expense) for the year
Profit/(loss) for the year	-	-	-	-	-	2,807	(3,036)	4,451	4,222
Total comprehensive income/(expense) for the year	-	-	-	-	-	2,807	(3,036)	4,451	4,222
Transactions with owners of the Company recognised directly in equity
Shares bought back for treasury	-	-	-	(547)	-	-	-	-	(547)
Dividends paid on Ordinary shares	-	-	-	-	-	-	-	(4,346)	(4,346)
Capital returns paid on B shares	-	-	-	-	(1,549)	-	-	-	(1,549)
Balance as at 31 March 2019	134	153	5	81,643	16,540	(29)	15,226	6,433	120,105

 

Statement of Changes in Equity (audited)

for the year to 31 March 2018

	Share Capital	Share Premium	Capital Redemption Reserve	Buy Back Reserve	Special Capital Reserve	Capital Reserve - Investments sold	Capital Reserve - Investments held	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 1 April 2017	134	153	5	82,711	19,589	(9,910)	33,183	5,784	131,649
Total comprehensive income/(expense) for the year
Profit/(loss) for the year	-	-	-	-	-	7,074	(14,921)	4,764	(3,083)
Total comprehensive income/(expense) for the year	-	-	-	-	-	7,074	(14,921)	4,764	(3,083)
Transactions with owners of the Company recognised directly in equity
Shares bought back for treasury	-	-	-	(521)	-	-	-	-	(521)
Dividends paid on Ordinary shares	-	-	-	-	-	-	-	(4,220)	(4,220)
Capital returns paid on B shares	-	-	-	-	(1,500)	-	-	-	(1,500)
Balance as at 31 March 2018	134	153	5	82,190	18,089	(2,836)	18,262	6,328	122,325

BMO UK High Income Trust PLC

Principal Risks and Uncertainties and Viability Statement

Most of the Company's principal risks and uncertainties that could threaten its objective, strategy, future performance, liquidity and solvency are market related and comparable to those of other investment trusts investing primarily in listed securities.

In accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, issued by the Financial Reporting Council, the Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. These significant risks, emerging risks and other risks, including Brexit are regularly reviewed by the Audit Committee and the Board. It has also regularly reviewed the effectiveness of the Company's risk management and internal control systems for the period. Whilst there are ongoing uncertainties regarding Brexit, the Board does not consider that any related outcome will have a significant impact on the operations of the Company.

The principal risks and uncertainties faced by the Company, and the Board's mitigation approach are described below.

Financial Risk.

The Company's assets consist mainly of listed equity securities and its principal financial risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk.

Mitigation:  

The Board regularly considers the composition and diversification of the Investment Portfolio and considers individual stock performance together with purchases and sales of investments.  Investments and markets are discussed with the Manager and a Strategy meeting is held annually. An explanation of these risks and the way in which they are managed are contained in the notes to the financial statements.

Investment and strategic risk.

Incorrect strategy, asset allocation, stock selection, inappropriate capital structure, insufficient monitoring of costs, failure to maintain an appropriate level of discount/premium and the use of gearing could all lead to poor returns for shareholders including impacting the capacity to pay dividends.

Mitigation: 

The Company's objective and investment policy and performance against peers and benchmark are considered by the Board at each meeting.  A separate Board meeting is also held each year to consider strategic issues. The Investment Portfolio is diversified and comprises listed securities and its composition is reviewed regularly with the Board. BMO GAM's Investment Risk team provides oversight on investment risk management. Market intelligence is maintained via the Company's Broker and the effectiveness of the marketing strategy is also reviewed at each meeting. The Manager also meets with major shareholders. The Board regularly considers operating costs combined with underlying dividend income from portfolio companies and the consequent dividend paying capacity of the Company.

Regulatory. 

Breach of regulatory rules could lead to the suspension of the Company's Stock Exchange listing, financial penalties, or a qualified audit report. Breach of section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains. Changes to tax regulations could alter the market competitiveness of the Company's B Shares.

Mitigation: 

The Board liaises with advisors to ensure compliance with laws or regulations. The Manager and its Business Risk department provide regular reports to the Board and Audit Committee on their monitoring and oversight of such rules and are reviewed by the Board.  This includes the conditions to maintain investment trust status including the income distribution requirement. The Board has access to BMO GAM's Head of Business Risk and requires any significant issues directly relevant to the Company to be reported immediately.

Operational. 

Failure of the Manager's systems or disruption to its business, or that of an outsourced or third party service provider, could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets leading to a potential breach of the Company's investment mandate or loss of shareholders' confidence. External cyber attacks could cause such failure or could lead to the loss or sabotage of data.

Mitigation:

The Board meets regularly with the management of BMO GAM and its Business Risk team to review internal control and risk reports which includes oversight of third party service providers. The Manager's appointment is reviewed annually.  The contract can be terminated with six months' notice. A business continuity plan is in place. The Manager continues to benefit from the long-term financial strength and policies of its parent company, Bank of Montreal. BMO GAM has outsourced trade processing, valuation and middle office tasks and systems to State Street Bank and Trust Company and supervision of such third party service providers, including DST Financial Services who administer the BMO savings plans, has been maintained by BMO GAM and includes the review of IT security and heightened cyber threats.

Custody Risk.

Safe custody of the Company's assets may be compromised through control failures by the custodian.

Mitigation: 

The Board receives quarterly reports from the Depositary confirming safe custody of the Company's assets and cash and holdings are reconciled to the Custodian's records. The Custodian's internal controls reports are also reviewed by the Manager and key points reported to the Audit Committee.  The Board also receives periodic updates from the custodian on its own cyber-security controls. The Depositary is specifically liable for loss of any of the Company's securities and cash held in custody.

Viability assessment and statement

In accordance with the UK Corporate Governance Code, the Board is required to assess the future prospects for the Company, and has considered that a number of characteristics of its business model and strategy were relevant to this assessment:

·      The Board looks to long-term outperformance rather than short-term opportunities.

·      The Company's investment objective, strategy and policy, which are subject to regular Board monitoring, mean that the Company is invested mainly in liquid listed securities and that the level of borrowing is restricted.

·      The Company is a closed-end investment trust, whose shares are not subject to redemptions by shareholders.

·      Subject to shareholder continuation votes, in the event that the net asset value total return performance of the Company is less than that of the FTSE All-Share Index over the relevant five year period, the Company's business model and strategy is not time limited.

Also relevant were a number of aspects of the Company's operational arrangements:

·      The Company retains title to all assets held by the Custodian under the terms of the formal agreement with the Custodian and Depositary.

·      The borrowing facilities, which remain available until September 2022, are also subject to formal agreements, including financial covenants with which the Company complied in full during the year.

·      Revenue and expenditure forecasts are reviewed by the Directors at each Board Meeting.

·      Cash is held with banks approved and regularly reviewed by the Manager.

In considering the viability of the Company, the Directors carried out a robust assessment of the principal risks and uncertainties which could threaten the Company's objective and strategy, future performance, liquidity and solvency.  These risks, their mitigations and the processes for monitoring them are set out above within Principal Risks and Uncertainties and in the Report of the Audit Committee and in Note 21 of the financial statements within the Annual Report.

The Directors have also considered:

·      the level of ongoing charges incurred by the Company which are modest and predictable and total 0.98% of average net assets,

·      future revenue and expenditure projections,

·      the Company's borrowing and liquidity in the context of the fixed rate loan which is due to mature in September 2022,

·      its ability to meet liquidity requirements given the Company's investment portfolio consists mainly of readily realisable listed equity securities which can be realised to meet liquidity requirements if required,

·      the ability to undertake share buybacks if required,

·      the effect of significant future falls in investment values and the ability to maintain dividends and capital repayments and

·      the uncertainties regarding Brexit and the UK's related ongoing negotiations to leave the EU.

These matters were assessed over a five year period to May 2024, and the Board will continue to assess viability over five year rolling periods, taking account of severe but plausible scenarios.  A rolling five year period represents the horizon over which the Directors believe they can form a reasonable expectation of the Company's prospects, balancing the Company's financial flexibility and scope with the current outlook for longer-term economic conditions affecting the Company and its shareholders.

Based on their assessment, and in the context of the Company's business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period to May 2024.

 

Statement of Directors' Responsibilities in Relation to the Annual Report and Financial Statements

In accordance with Chapter 4 of the Disclosure Guidance and Transparency Rules, the Directors confirm, in respect of the Annual Report and financial statements for the year ended 31 March 2019 of which this statement of results is an extract, that to the best of their knowledge:

·      the financial statements contained within the Annual Report have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      the Strategic Report (comprising the Chairman's Statement, Strategy and Business Model, Policy Summary, Sustainability and our ESG policies, Key Performance Indicators, Principal Risks and Uncertainties and Viability Statement, Manager's Review, Classification of Investments and Investment Portfolio) and the Report of the Directors include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that they face;

·      taken as a whole, the annual report and financial statements are fair, balanced and understandable and provide the information necessary for shareholders to assess the performance, strategy and business model of the Company;

·      the financial statements include details on related party transactions; and

·      having assessed the principal risks and uncertainties and other matters discussed in connection with the Viability Statement, it is appropriate to adopt the going concern basis in preparing the financial statements.

On behalf of the Board

Iain McLaren

Chairman

22 May 2019                                                      

 

Notes (audited)

1.            The financial statements of the Company which are the responsibility of, and were approved by, the Board on 22 May 2019, have been prepared on a going concern basis under the historical cost convention modified to include fixed asset investments and derivatives at fair value and in accordance with the Companies Act 2006, International Financial Reporting Standards (''IFRS''), which comprise standards and interpretations approved by the International Accounting Standards Board (the ''IASB''), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee (''IASC'') that remain in effect, and to the extent that they have been adopted by the European Union.

The Company's subsidiary undertaking Investors Securities Company Limited has not been consolidated in the financial statements as it is exempt in accordance with Section 405(2) of the Companies Act 2006 on grounds of materiality. Investors Securities Company Limited has been classified at fair value through profit of loss in the Statement of Financial Position.

Where presentational guidance set out in the Statement of Recommended Practice (''SORP'') for investment trusts issued by the Association of Investment Companies (''AIC'') is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

2.            The Company's earnings per share are based on the profit for the year of £4,222,000 (year to 31 March 2018 loss: £3,083,000) and on 86,904,582 Ordinary shares (2018: 87,138,309) and 30,976,703 B shares (2018: 30,976,703), being the weighted average number of shares in issue of each share class during the year. 

The Company's revenue earnings per share are based on the revenue profit for the year of £4,451,000 (year to 31 March 2018: £4,764,000) and on the weighted average number of shares in issue as above.

The Company's capital earnings per share are based on the capital loss for the year of £229,000 (year to 31 March 2018 loss: £7,847,000) and on the weighted average number of shares in issue as above.

3.            The fourth interim dividend of 1.29p per Ordinary share, was paid on 3 May 2019 to Ordinary shareholders on the register at close of business on 5 April 2019, having an ex-dividend date of 4 April 2019. The fourth capital repayment of 1.29p per B share was paid on 3 May 2019 to B shareholders on the register on 5 April 2019.

4.            The Company has a £7.5 million unsecured term loan from Scotiabank Europe plc with a five year term to 28 September 2022 and at a fixed interest rate of 2.58 per cent per annum. The Company also has a £7.5 million unsecured multicurrency revolving credit facility ("RCF") with Scotiabank (Ireland) Designated Activity Company available until 28 September 2022. £nil of the RCF was drawn down at 31 March 2019 (£nil at 31 March 2018). Arrangement and legal fees of £55,000 were incurred and are being amortised over the term of these facilities.

The loan agreements contain certain financial covenants with which the Company must comply. These include a financial covenant with respect to the ratio of the Adjusted Net Asset Value (as defined in the loan agreements) to the level of debt and also that the Net Asset Value does not fall below £65 million. The Company complied with the required financial covenants throughout the period since drawdown.

The fair value of the £7.5 million term loan, calculated using a discounted cashflow technique, is not materially different from the value reflected in the Statement of Financial Position.

5.            During the year the Company bought back 600,000 Ordinary Shares (2018: 500,000 Ordinary shares) to hold in treasury at a cost of £547,000 (2018: £521,000) and nil B shares (2018: nil B shares) Shares to hold in treasury. The Company did not buy back any shares for cancellation during the year (2018: nil).

At 31 March 2019 the Company held 15,739,000 Ordinary Shares (2018: 15,139,000 Ordinary shares) and 1,100,000 B shares (2018: 1,100,000 B shares) in treasury.

6.            The Company's basic net asset value per share of 102.39p (2018: 103.75p) is based on the equity shareholders' funds of £120,105,000 (2018: £122,325,000) and on 117,304,847 equity shares, consisting of 86,328,144 Ordinary Shares and 30,976,703 B Shares (2018: 117,904,847 equity shares, consisting of 86,928,144 Ordinary Shares and 30,976,703 B Shares), being the number of shares in issue at the year end.

The Company's shares may also be traded as units, each unit consisting of three Ordinary Shares and one B Share. The basic net asset value per unit as at 31 March 2019 was therefore 409.56p (2018: 415.00p).

The Company's treasury net asset value per share, incorporating the 15,739,000 Ordinary Shares and 1,100,000 B Shares held in treasury at the year end (2018: 15,139,000 Ordinary Shares and 1,100,000 B Shares), was 101.75p (2018: 103.12p). The Company's treasury net asset value per unit at the end of the year was 407.00p (2018: 412.48p). The Company's policy is to only re-sell shares held in treasury at a price representing a discount of not more than 5 per cent to net asset value at the time of sale, together with other conditions. Accordingly, for the purpose of the calculation, such treasury shares are valued at the higher of net asset value less 5 per cent and the mid market share price at each year end.

7.            Financial Instruments

The Company's financial instruments comprise equity investments, cash balances, receivables and payables that arise directly from its operations and borrowings. As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company makes use of borrowings to achieve enhanced returns. The downside risk of borrowings can be mitigated by raising the level of cash balances held.

The Company may use derivatives for efficient portfolio management from time to time. No derivative financial instruments were used during the year. The only derivatives used in the prior year were forward foreign exchange currency contracts to hedge currency movements. The Company may also write call options over some investments held in the Investment Portfolio. There were no call options written during the current year or prior year.

The fair value of the financial assets and liabilities of the Company at 31 March 2019 is not materially different from their carrying value in the financial statements.

The Company is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, market price risk, liquidity risk, interest rate risk and foreign currency risk.

The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and have remained unchanged for the year under review.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Company.

The Company's principal financial assets are bank balances and cash and other receivables, whose carrying amounts in the Statement of Financial Position represent the Company's maximum exposure to credit risk in relation to financial assets. The Company did not have any exposure to any financial assets which were past due or impaired at the current or prior year end.

The Company is exposed to potential failure by counterparties to deliver securities for which the Company has paid, or to pay for securities which the Company has delivered. A list of pre-approved counterparties used in such transactions is maintained and regularly reviewed by the Manager, and transactions must be settled on a basis of delivery against payment. Broker counterparties are selected based on a combination of criteria, including credit rating, balance sheet strength and membership of a relevant regulatory body. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the acceptable quality of the brokers used. The rate of default in the past has been insignificant.

All of the assets of the Company are held by JPMorgan Chase Bank, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to the securities held by the custodian to be delayed or limited. The Board monitors the Company's risk by reviewing the custodian's internal control reports.

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings, normally rated A or higher, assigned by international credit rating agencies. Bankruptcy or insolvency of such financial institutions may cause the Company's ability to access cash placed on deposit to be delayed, limited or lost.

The Company has no significant concentration of credit risk with exposure spread over a number of counterparties and financial institutions.

Market price risk

The fair value of equity and other financial securities held in the Company's portfolio fluctuates with changes in market prices. Prices are themselves affected by movements in currencies and interest rates and by other financial issues, including the market perception of future risks. Other external events such as protectionism, inflation or deflation, economic recessions and terrorism could also affect share prices in particular markets. The Company's strategy for the management of market price risk is driven by the Company's investment policy. The Board sets policies for managing this risk and meets regularly to review full, timely and relevant information on investment performance and financial results. The management of market price risk is part of the fund management process and is typical of equity investment. The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with an objective of maximising overall returns to shareholders. Investment performance is discussed in more detail in the Manager's Review in the Annual Report.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments. The risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given the liquid nature of the portfolio of investments and the level of cash and cash equivalents ordinarily held. Cash balances are held with a spread of reputable banks with a credit rating of normally A or higher, usually on overnight deposit. The Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.

In certain circumstances, the terms of the Company's bank loan entitle the lender to demand early repayment and, in such circumstances, the Company's ability to maintain dividend levels and the net asset value attributable to equity shareholders could be adversely affected. Such early repayment may be required on the occurrence of certain events of default which are customary for facilities of this type. These include events of non-payment, breach of other obligations, misrepresentations, insolvency and insolvency proceedings, illegality and a material adverse change in the financial condition of the Company.

Interest rate risk

Some of the Company's financial instruments are interest bearing. They are a mix of both fixed and variable rate instruments with differing maturities. As a consequence, the Company is exposed to interest rate risk due to fluctuations in the prevailing market rate. The Company's exposure to floating interest rates gives cashflow interest rate risk and its exposure to fixed interest rates gives fair value interest rate risk.

Floating rate

When the Company retains cash balances the majority of the cash is held in deposit accounts. The benchmark rate which determines the interest payments received on cash balances is the bank base rate, which was 0.75 per cent at 31 March 2019 (2018: 0.50 per cent).

Fixed rate

At 31 March 2019 and 31 March 2018, the Company's Investment Portfolio did not contain any fixed interest or floating rate interest assets. At 31 March 2019 and 31 March 2018, the Company had fixed interest liabilities.

The £7.5 million term loan carries a fixed interest rate of 2.58 per cent per annum.

Foreign currency risk

It is not the Company's policy to hedge any overseas currency exposure on equity investments.

8.            Going Concern

The Company's investment objective and policy which is subject to regular Board monitoring processes, is designed to ensure that the Company is invested mainly in liquid, listed securities. The Company retains title to all assets held by its custodian and has agreements relating to its borrowing facilities with which it has complied during the year. Cash is only held with banks approved and regularly reviewed by the Manager.

9.            This statement was approved by the Board on 22 May 2019. It is not the Company's full statutory financial statements in terms of Section 434 of the Companies Act 2006. The statutory annual report and financial statements for the year ended 31 March 2019 has been approved and audited and received an unqualified audit report and did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report. This will be sent to shareholders in early June 2019 and will be available for inspection at 6^th Floor, Quartermile 4, 7a Nightingale Way, Edinburgh, EH3 9EG the registered office of the Company.  

The full annual report and financial statements are available on the website maintained on behalf of the Company at www.bmoukhighincome.com.

The audited financial statements for the year to 31 March 2019 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 9 July 2019.

Alternative Performance Measures ("APMs")

The Company uses the following Alternative Performance Measures ("APMs"):

Discount/Premium - the share price of an Investment Trust is derived from buyers and sellers trading their shares on the stock market. This price is not identical to the net asset value (NAV) per share of the underlying assets less liabilities of the Company. If the share price is lower than the NAV per share, the shares are trading at a discount. This usually indicates that there are more sellers of shares than buyers. Shares trading at a price above NAV per share are deemed to be at a premium.

		31 March 2019
		Ordinary shares	B shares	Units
Net asset value per share	(a)	102.39p	102.39p	409.56p
Share price	(b)	95.0p	95.0p	373.0p
(Discount) (c=(b-a)/(a))	(c)	(7.2%)	(7.2%)	(8.9%)

Ongoing Charges - all operating costs expected to be incurred in future and that are payable by the Company, expressed as a proportion of the average net assets of the Company over the reporting year. The costs of buying and selling investments and derivatives are excluded, as are interest costs, taxation, non‑recurring costs and the costs of buying back or issuing shares.

Ongoing charges calculation

		31 March 2019 £'000
Total expenditure		1,262
Less credit facility commitment fee		(42)
Less actual management fee charged at rate of 0.65% of net asset value		(793)
Add management fee at a rate of 0.65% of net asset value at 31 March 2019		781
Total	(a)	1,208
Average daily net assets	(b)	122,862
Ongoing charges (c = a/b)	(c)	0.98%

Total return - the theoretical return to shareholders calculated on a per share basis by adding dividends paid in the period to the increase or decrease in the Share Price or NAV in the period. The dividends are assumed to have been re‑invested in the form of shares or net assets, respectively, on the date on which the shares were quoted ex‑dividend.

The effect of reinvesting these dividends on the respective ex‑dividend dates and the share price total returns and NAV total returns are shown below.

	31 March 2019
	Ordinary shares/ B shares	Units
NAV per share at start of financial year	103.75p	415.00p
NAV per share at end of financial year	102.39p	409.56p
Change in the year	-1.3%	-1.3%
Impact of dividend reinvestments†	4.8%	4.8%
NAV total return for the year	3.5%	3.5%

^†During the year to 31 March 2019 dividends/capital repayments totalling 5.0p (Ordinary shares/B shares) and 20.0p (units) went ex dividend.

	31 March 2019
	Ordinary shares	B shares	Units
Share price per share at start of financial year	96.5p	95.8p	397.0p
Share price per share at end of financial year	95.0p	95.0p	373.0p
Change in the year	-1.6%	-0.8%	-6.0%
Impact of dividend reinvestment†	5.3%	5.3%	5.0%
Share price total return for the year	3.7%	4.5%	-1.0%

^†During the year to 31 March 2019 dividends/capital repayments totalling 5.0p (Ordinary shares/B shares) and 20.0p (units) went ex dividend.

Yield - The total annual dividend/capital repayment expressed as a percentage of the year end share price.

		31 March 2019
		Ordinary shares	B shares	Units
Annual dividend	(a)	5.04p	5.04p	20.16p
Share price	(b)	95.0p	95.0p	373.0p
Yield = (c=a/b)	(c)	5.3%	5.3%	5.4%

For further information, please contact:

Philip Webster                                                                          

Fund Manager to BMO UK High Income Trust PLC                      Tel:        [phone]

Ian Ridge

For BMO Investment Business Limited

Company Secretary to BMO UK High Income Trust PLC              Tel:        [phone]

 

END

 

 

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