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To: RNS
From: BMO UK High Income Trust PLC
Date: 25 May 2021
LEI: 213800B7D5D7RVZZPV45
Statement of Audited Results for the year ended 31 March 2021
Financial Highlights
· Distribution yield(1) of 5.8% on Ordinary shares and B shares at 31 March 2021, compared to the yield on the FTSE All-Share Index of 2.9%. Total distributions increased by 1.7% to 5.30p per share compared to the prior year.
· Net asset value total return(1) per share for the year was +37.4%, compared to the Benchmark(2) total return of +26.7%.
· Ordinary share price total return(1) per share for the year was +40.8%, compared to the Benchmark total return of +26.7%.
· B share price total return per share for the year was +44.9% compared to the Benchmark total return of +26.7%.
(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
• Net asset value total return for the financial year significantly ahead of the benchmark index
• Distribution yield of 5.8% on Ordinary shares and B shares at 31 March 2021
Performance
I am pleased to report that in the year to 31 March 2021 your Company has produced excellent returns in both absolute and relative terms. The Net Asset Value ('NAV') total return was +37.4%, significantly ahead of the total return of +26.7% for the FTSE All-Share Index (the benchmark index).
For the Ordinary shares, the share price total return for the year was +40.8%, greater than the NAV total return as the share price discount to NAV narrowed from 9.3% at the start of the year to 7.8% at the end. For the B shares, the equivalent return was +44.9% and the discount change was from 11.9% to 7.8%.
The benchmark index marked its 2020 low point on 23 March reflecting, at that time, the significant uncertainty that the COVID-19 pandemic was creating in a period of rapidly rising infection rates in the UK. This coincided with the initial lockdown measures being introduced in the UK and there were major concerns as to the impact that the lockdown might have on economic activity and corporate profitability.
As the above returns would suggest the stock market rallied substantially and in fact out of the 12 months of your Company's financial year the benchmark index recorded a positive return in eight months and indeed the poorest month saw only a 3.8% decline. It has indeed been an unusual and positive year and perhaps not a level or nature of return that was anticipated 12 months ago.
The recovery in the market which was already well underway was boosted in November and December 2020 by news of successful tests of three separate vaccines and was sustained in January by the outcome of the Brexit negotiations in which a deal was reached and the worst effects of a no deal exit avoided.
Finally as 2021 unfolded it became evident that the vaccination programme in the UK was running to schedule and that a significant proportion of the population, and particularly those in the groups most vulnerable to COVID-19, had been vaccinated and that easing of the lockdown restrictions was once again prudent and possible.
Your Manager supplemented the positive return from the benchmark index by good stock selection and also by the consistent use of the Company's borrowing facilities adding leverage to the portfolio performance over the period. The Manager comments in detail on the portfolio construction and performance attribution in his report.
Your Board has been in close contact with the Manager throughout what has been, despite the positive returns, an uncertain period and is most encouraged by the return achieved and the consistent approach adopted by the Manager in a period in which working from home has been the norm for all our advisors and service providers.
Dividends and Capital Repayments
Stock markets are forward looking and the substantial capital return generated in the financial year reflects the market anticipating a significant recovery in economic activity and corporate profits as normality returns post lockdown.
Dividends paid by companies are however a lagging indicator and as discussed in my Chairman's statements in the 2020 annual and interim reports, dividends from UK companies have, in aggregate, been substantially reduced when compared to the previous year.
This is reflected in the investment income earned by your Company in the financial year, which has declined from £4.8 million to £3.8 million, a reduction of 22%. Your Board and Manager discussed the revenue position regularly throughout the year. Early in the financial year the Board agreed criteria around which the 2021 dividend would be set. The criteria related to a combination of the earnings for the year, the estimate of earnings for the next financial year to 31 March 2022 and the level of drawdown from revenue reserves that the Board was prepared to approve.
In fact revenue earnings have turned out to be higher than expected and certainly better than the most pessimistic expectations early in the financial year. Consequently, and in line with the Board's criteria, a total dividend of 5.30p per Ordinary share has been paid, an increase of 1.7% on the dividend paid in respect of the year to 31 March 2020. Following this payment the revenue reserve will be £3.4 million, equivalent to 3.96p per Ordinary share or 74.7% of the total annual dividend paid in respect of the year to 31 March 2021.
Given the scale of reduction in UK dividends in 2020, estimated by Link to be down 41.6% year on year, the Board is much encouraged by the Company's revenue return. It is also encouraging that the process that your Manager has been following of moving from being invested in companies with higher dividend yields but likely slower or indeed no growth in those dividends, to companies with lower dividend yields but potentially faster growing dividends, continued during the year. Indeed many of the actions taken by the Manager in this respect in previous years proved prescient as the Company's much reduced holdings in Shell and BP for example, avoided the worst of the severity of the substantial reductions in those companies dividends, which previously were large contributors to our Company's revenue.
A fourth quarter interim dividend and capital repayment of 1.43p per share was paid on 7 May 2021 to Ordinary shareholders and B shareholders respectively, on the register on 6 April 2021. The total dividend/capital repayment for the year to 31 March 2021 represented a yield of 5.8% based on the Ordinary share price and the B share price, both of which were 91.5p as at 31 March 2021.
Share Buy Backs
At the financial year end, the Company's Ordinary share price and B share price both stood at a discount to net asset value of 7.8%. The average discount level at which the Company's Ordinary shares and B shares traded relative to net asset value in the year was 9.7% and 9.2% respectively.
During the year the Company bought back 750,000 Ordinary shares and 150,000 B shares, representing 0.9% and 0.5% of the Ordinary shares and B shares respectively, in issue at the start of the year. The price paid for the Ordinary shares and B shares represented a discount of approximately 11.7% and 11.0% respectively, to the prevailing net asset value at the time of purchase.
Operations
In addition to the impact on financial markets, the COVID-19 pandemic has also impacted the way in which the Manager and other third-party service providers have had to operate, and this has been monitored closely by the Board. From mid-March 2020 the Manager implemented working from home arrangements for its staff as have many of the Company's other third-party service providers. I am pleased that these arrangements have proved very effective and consequently there has been no impact on service delivery or your Company's operations. Board meetings have been held by video conference without disruption and the Board has been in close contact with the Manager throughout this period.
Board Succession
In accordance with the Board's long-term planning, Julia Le Blan will retire as a Director and as Chair of the Audit Committee following the Annual General Meeting on 27 July 2021. Julia was appointed to the Board in January 2011 and has chaired the Audit Committee for the majority of her tenure. I would like to thank Julia for her hard work, enthusiasm and commitment over a period in which the position of Audit Chair has become more demanding as the level of oversight and regulation involved in the Audit has risen and become ever more stringent.
Helen Galbraith, who joined the Board in May 2020, will as planned and previously disclosed, take over as Audit Chair upon Julia's retirement.
Following the AGM, the Board will consist of four non-executive directors each of whom will have served less than 9 years on the Board and will in all respects be considered independent. The Board will thus comply with the best standards of corporate governance.
BMO
Our Manager is part of BMO Global Asset Management which is ultimately owned by the Bank of Montreal. It was announced on 12 April 2021 that Bank of Montreal have agreed to sell its European, Middle East and African (EMEA) asset management activities to AMERIPRISE Inc. This sale is expected to conclude towards the end of 2021. For the UK element of this transaction the new owners will be Columbia Threadneedle. Columbia Threadneedle does not have an Investment Trust business in the UK and the Board has been informed that this will be a welcome addition to its portfolio.
Both companies have confirmed the importance of maintaining the stability and continuity of the teams which presently support your Company but the change of ownership and subsequent developments are issues that the Board will monitor closely in the coming months.
Responsible Investment
Environmental, Social and Governance ('ESG') engagement is an activity in which your Manager has a long and respected record of achievement. ESG considerations lie at the core of your Manager's investment process and the Board receives regular reports on all aspects of ESG interaction. More formal reporting of ESG activity and outcomes is now increasingly required and a section of the Annual Report addresses this. The Board and Manager are pleased to be able to share this process with investors in a more formal manner and illustrates the engagement the Manager has had with investments within our portfolio. We would hope that the commitment to ESG principles is demonstrated by the report.
Online Shareholder Meeting and Annual General Meeting
The Annual General Meeting ('AGM') is scheduled to be held on 27 July 2021 at the offices of BMO Global Asset Management, Quartermile 4, 7a Nightingale Way, Edinburgh, EH3 9EG at 12 noon.
Mindful of the possibility of continued restrictions due to the COVID-19 pandemic including social distancing measures and restrictions on public gatherings; ongoing Government advice; the possibility that some of these measures may still be in place in July and the desire to provide certainty over arrangements, the AGM will be restricted to the formal business of the meeting as set out in the notice of the Annual General Meeting.
In order to enable interaction and engagement with our shareholders, the Board has decided to hold an interactive online shareholder meeting at 2pm. on 6 July 2021. At this meeting, shareholders will receive a presentation from Philip Webster, the Fund Manager and there will also be the opportunity for a question and answer session with the Fund Manager and your Board. By holding this separate online meeting in advance of the AGM there will be time for shareholders to subsequently lodge their proxy votes having had the opportunity to engage with the Board and Fund Manager and to hear his presentation. I would encourage all shareholders to do so. Online access details for the presentation will be included on the Form of Proxy or Form of Direction or can be obtained by sending an email to [email protected].
The formal business of the AGM will be held three weeks later on 27 July 2021. Arrangements will be made by the Company to ensure that the minimum number of shareholders required to form a quorum will attend the AGM in order that the meeting may proceed and the business be concluded. The Board considers these arrangements to be in the best interests of shareholders given the current circumstances.
The Board strongly discourages shareholders from attending the AGM and entry will be restricted and/or refused in accordance with the Articles, the Law and/or Government guidance in place at the time of the AGM and/or the venue's security arrangements.
Nevertheless, shareholders can be represented by the chairman of the meeting acting as their proxy. We would strongly encourage all shareholders to make use of the proxy form provided and appoint the chairman of the meeting in order that you can lodge your votes. Voting on all resolutions will be held on a poll, the results of which will be announced and posted on the Company's website following the AGM.
Any questions or comments from shareholders who are unable to join the online shareholder meeting may be submitted to the Company Secretary ([email protected]). These will be relayed to the Board and we will respond in due course.
Outlook
As discussed above stock markets have moved very quickly to discount the recovery that should follow the release of the economy from lockdown and other measures taken to counter the COVID-19 pandemic. Risks still remain and it is far from certain that a third wave of infection will not emerge. The level of stimulus being applied to the UK and in particular US economies is significant and unprecedented. In the UK the level of consumer spending seems set to recover following a protracted period of enforced saving. Your Manager guided the portfolio well through the uncertainty of the past year and the Board is confident that sound stewardship will continue in the hopefully more benign circumstances that we now enjoy.
John M Evans
Chairman
24 May 2021
Manager's Review
The last year has gone down as one of the toughest, and eventful, of my near two decades in the industry. It's not easy to sum up such a tumultuous year given the near total closure of the 'global' economy, an unparalleled liquidity response from governments and the onset of a year of working from home, or in many cases being furloughed.
There have been many twists and turns over the last 12 months. I certainly wouldn't have foreseen another prolonged lockdown, or a second spike in cases that would keep the UK economy shut until April of 2021. I also didn't think I would be entering this year still working-from-home, or that I would have already received my first vaccination. In that regard, the pharmaceutical industry, and their partners, have been relentless in their research and development in the delivery of a number of vaccines. These headline vaccine announcements in November drove a step-change in markets, and a path to recovery. The UK is particularly well placed, delivering one of the fastest vaccination programs in the developed world. With cases and loss of life dropping to pandemic lows, wave one of the opening-up process has already started, which bodes well for additional constraints being lifted thereafter.
At the point of penning my report last year there were so many unknowns. While there still remains several unanswered questions, the line of sight on a recovery is clearer than it was in the middle of 2020.
Paralysis of the system
What struck me most about the crisis was the pace of the initial collapse - 33% (peak to trough for the FTSE All-Share) - in a matter of weeks. Whilst I've witnessed crises before, I have never seen it happen so abruptly and bring with it an impact on 'all my holdings'. As I stated last year, there were so many unknowns for management teams to deal with and so many uncertainties about the recovery path. Against this backdrop, I must applaud the management teams I spoke to for their dynamism in scenario planning, reshaping businesses and costs, getting staff up and running at home, embracing technology, and continuing to deliver a quality service to their customers. Their communication with the market stepped up significantly and the work taken to position businesses for the recovery, was a major reason for your Company's outperformance in the financial year.
As a closing remark on last year, crises also serve up a reminder of the principles of fund management: buy good quality businesses with strong balance sheets. These simple rules are easy to forget in the good times, but help protect shareholder capital, or at the very least give management teams time to make the right decisions, through these extreme conditions.
Performance
I am extremely pleased at the 37.4% net asset value (NAV) total return, a near 11% outperformance versus the benchmark. This is the culmination of work we have done over several years to improve the quality of the portfolio and differentiate it through concentration. This foundation provided the bedrock for us to make stock specific decisions during the financial year.
When you build concentrated, differentiated strategies, it often doesn't get noticed until periods such as we have just witnessed. While I can talk about the investment portfolio being different, it's only through these extreme events that you really get to see how irrelevant the benchmark has become, and why this is about our individual holdings. There were several legs to the outperformance; cutting some of the weakest sectors pre-Covid (oil & gas and banks), increasing the quality and contrarian views in the mid-cap space, adding to our European exposure and finally taking our technology weight to around 10% of the portfolio.
I don't want to labour a point I've made several times on oil & gas or banks. They are bouncing off their lows, but they have destroyed a lot of capital and cut dividends, in the case of banks to zero. I did, however, want to point out that the UK has a plethora of what I feel are high quality financials, with a sustainable competitive advantage. We own several of these; Brewin Dolphin, Close Brothers and Intermediate Capital Group, a list that isn't exhaustive. Over the last financial year, they have delivered a total return of 49%, 44% and 114% respectively. Over the same period, HSBC, the UK's largest bank by market cap, has delivered -4%. I'm at a loss at times to explain the rationale for owning banks, especially given the names I have mentioned and the returns they have delivered. The three financials in question are the top 3 relative weights in the portfolio, positions I expect to continue to run as I see further growth as the market recovers.
Activity
We also added to several out-of-favour and more cyclical domestic names during the pandemic. These included both our UK housebuilders, Berkeley Group and Vistry Group. Vistry Group is an amalgam of the old Bovis Homes and Linden Homes & Partnerships (acquired from Galliford Try in early 2020). I single this out as it has risen 130% since October, and 32% in March alone. The March performance was buoyed by a solid set of full-year 2020 results, strong trading at the outset of 2021 and a net cash balance sheet that has allowed the resumption of their dividend. The company also guided to a near doubling of the pre-tax profit in 2021, a number which several analysts already feel is conservative. We also added to catering company Compass Group very early on in the pandemic, another name that posted a sharp recovery and is a top 10 position in the portfolio. We have conducted several calls with the management team and remain comfortable that the weaker divisions will recover, outsourcing will accelerate, evidenced by strong customer wins, and margins will recover to pre-Covid levels on a leaner cost base. We have selectively increased our European exposure throughout the year. We have added three names to the portfolio, which I feel are not available in the UK market; Compagnie Financière Richemont ('Richemont'), Deutsche Boerse and Scout 24. The Hut Group was also invested in but is quoted in the UK. Again, several of these were out of favour at the point of initiation: luxury brand owner Richemont and Deutsche Boerse, Europe's leading exchange. Richemont has been a particularly strong performer up 83% over the last financial year driven by strong growth from their jewellery brands Cartier and Van Cleef Arpel. A repositioned watch division is beginning to bear fruit and losses from the Yoox Net a Porter business will ameliorate once the re-platforming of the business is complete.
The final piece of the jigsaw and one which is generally missing from income portfolios, is structural growth technology. These tend to be zero or very low yielders and therefore overlooked by most of my peers. As most of you will know, I have long been an advocate of these 'platforms'. This last year has seen a huge structural shift as we were forced to embrace the online world through prolonged periods of lockdown. Within the investment portfolio are several of the platforms that have benefitted from this trade including Asos (fashion), Just Eat Takeaway and Delivery Hero (food delivery), The Hut Group (beauty/nutrition) and Scout24 (European Rightmove). These represent 10% of the portfolio today and despite the fact there are concerns that growth may slow as markets normalise, the huge structural shift in customer behaviour, in my opinion, won't return to pre-Covid levels.
In conclusion a crisis always provides a good opportunity to continue upgrading the portfolio and to take advantage of opportunities. This opportunity was most evident at the quality end of the curve where valuations have been trading at elevated, if not extreme, levels in some cases.
The Hut Group
I meet companies all day in search of something truly unique, and in 'The Hut Group' (THG), I feel I've found one of those businesses. As a recent IPO, many of you may not have heard of THG, but you could well be familiar with their two main brands. The first is online beauty portal Lookfantastic. It is the largest pure-play online beauty retailer globally, a position they recently strengthened with the acquisition of Dermstore.com in the US. This is a fragmented market in which THG holds a market leading online position with most of the key brands using them as a distribution channel. THG Beauty also owns 9 brands with a vertically integrated infrastructure that has been driven by M&A.
The second brand is THG's nutrition business, 'Myprotein'. This is a similarly integrated business selling products into the Gym and Health & Wellness channels - these include protein powders, vitamins, snacks and ready-to-drink (RTD) products. They have a very strong growth profile in Asia, which is driving significant growth for the division.
The final, and most exciting division is 'Ingenuity'. The internally developed infrastructure that sits behind Lookfantastic and Myprotein is now being sold under their 'Ingenuity' label. It covers almost every element of a direct-to-consumer (D2C) business model. It is relatively early days, but the contribution Ingenuity is making to THG's revenue is growing fast (expected to grow 175% in 2021). As the transition to online retail continues, the platform is highly attractive to companies like Nestle, P&G and Coke. Why? Because THG has already put in the time, energy and expertise into developing their global infrastructure that has a proven track record. The potential of Ingenuity is clear. Nestle's original deal, was for £400,000 but today they are utilising the platform across almost all divisions and now have a £140m 10-year contract. These are compelling numbers and given the lack of direct competitors we believe it's likely that THG will be playing an important and lucrative role in facilitating a shift in how many consumer-focused companies engage and sell to their customers.
Dividends
The Chairman's Statement highlights many of the challenges and successes we have had in mitigating the worst of the dividend cuts. It was always going to be a tough year as Boards took some very difficult, but in my opinion correct, decisions to protect cash and balance sheets during this unprecedented period.
Calendar 2020 dividends for the FTSE All Share Index fell 44% to £61.9bn, the lowest annual total since 2011. There were some standout statistics: two-thirds of companies cancelled or cut dividends between Q2 and Q4, the financial sector was the worst hit contributing two-fifths of these cuts, and Shell cut its dividend for the first time since World War II.
What was notable was the fact that FTSE 100 payouts fell less than mid and small-caps, down 35% for the year with the latter down 56%. You would expect this to be the case given the diversification and the balance sheet scale you get at the larger end of the market cap spectrum. Given this backdrop, and the significant move we have made to enhance our mid-cap exposure, it is pleasing to have outperformed the market. This plays to the qualities of the business models, and the balance sheets that we have bought. I'm also encouraged by those that have reinstated dividends, or made commitments to, in 2021. We have been cautious in our forecasting of dividends for the financial year to 31 March 2022, but we are encouraged by our initial analysis. Link Asset Monitor are forecasting a range of -1% to +8% growth for calendar year-end 2021, which shows how tough they feel this year will continue to be for dividends.
In such an unprecedented year for dividends, the worst in nearly a decade, the work we have done to improve the quality of the investment holdings has not only driven capital outperformance, but has also mitigated the worst of the fall in dividends. This outperformance, and the pace of the recovery we expect in 2021 allowed us to pay, and raise, the Company's dividend for the 2021 financial year. Maintenance of the dividend, and the current high yield we are paying stand out with most asset classes offering little or no yield. The 5.8% year-end distribution yield was double that of the index at that time.
ESG
While ESG is very much in vogue with the investing community BMO GAM has been a leading proponent of these practices for years.
Our dedicated in-house Responsible Investment team has been driving our engagement with the Company's holdings as we endeavour to lift best-practices of our investee companies. ESG is built into our investment process, identifying the qualities that come with good ESG practices whilst significantly helping to mitigate potential risks, be they financial, operational or reputational.
Whilst the Company is not badged 'responsible' or 'sustainable', the way we build portfolios tilts us towards businesses which have better environmental track records. As you are aware we have exited our oil & gas holdings, we own very few of the big industrial emitters of greenhouse gases which has seen the Company's carbon-footprint improve significantly. We don't stop there as you will see from the case studies in the Annual Report. We have pushed hard with Just Eat Takeaway.com to employ best practices on workers' rights, which others have chosen to ignore. We will continue to push the boundaries with the businesses in the investment portfolio in the pursuit of better standards across the ESG spectrum.
Outlook
I don't give forecasts, but there are several reasons to be encouraged about the year ahead. The UK market has, for now it seems, turned the corner and gone from being unloved to loved. The potential was always there, but with Brexit, weak growth, and a value bias (when all the market wanted was growth) there has long been a headwind to investing.
How quickly this has changed, and cash is beginning to flow back into UK equities. There are a few reasons for this, the first being valuation. The UK remains cheap against global equity markets that are at or near all-time highs. Alongside valuations, the UK, as I noted earlier, has also handled the vaccination programme well, which bodes well for the opening of the domestic UK economy. Savings rates have been boosted by the pandemic, and signs from markets that have opened ahead of the UK point to a lot of pent-up demand in the system. This will provide a tailwind to more domestically focused mid-caps, which will be larger beneficiaries of this trade.
From a portfolio perspective, I am also encouraged by the balance we have across our holdings. We have a good mix of businesses that are likely to benefit from the opening-up of trade, a recovering UK economy, and high-growth technology businesses that have seen a structural shift in behaviour. For the first time in years, there feels like a renewed optimism in the UK market with Brexit behind us, an emergence from the pandemic, and valuations that look cheaper than most in the developed world.
Philip Webster
Fund Manager
BMO Investment Business Limited
24 May 2021
Statement of Comprehensive Income (audited)
|
|
|
Year to31 March 2021 |
||
|
|
Note |
Revenue |
Capital |
Total |
|
|
|
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
Capital gains on investments |
|
|
|
|
|
Gains on investments held at fair value through profit or loss |
|
- |
29,988 |
29,988 |
|
Exchange losses |
|
- |
(35) |
(35) |
|
Revenue |
|
|
|
|
|
Investment income |
|
3,788 |
- |
3,788 |
|
|
|
|
|
|
|
Total income |
|
3,788 |
29,953 |
33,741 |
|
|
|
|
|
|
|
Expenditure |
|
|
|
|
|
Investment management fee |
|
(212) |
(494) |
(706) |
|
Other expenses |
|
(480) |
- |
(480) |
|
|
|
|
|
|
|
Total expenditure |
|
(692) |
(494) |
(1,186) |
|
|
|
|
|
|
Profit before finance costs and tax |
|
3,096 |
29,459 |
32,555 |
|
|
|
|
|
|
|
Finance costs |
|
|
|
|
|
Interest on bank loans |
|
(69) |
(160) |
(229) |
|
|
|
|
|
|
|
Total finance costs |
|
(69) |
(160) |
(229) |
|
|
|
|
|
|
|
Profit before tax |
|
3,027 |
29,299 |
32,326 |
|
Taxation |
|
(7) |
- |
(7) |
|
|
|
|
|
|
|
Profit and total comprehensive income for the year |
|
3,020 |
29,299 |
32,319 |
|
|
|
|
|
|
|
Earnings per share |
2 |
2.59p |
25.16p |
27.75p |
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 discontinued in the year.
Statement of Comprehensive Income (audited)
|
|
|
|
||||
|
|
|
Year to31 March 2020 |
||||
|
|
Note |
Revenue |
Capital |
Total |
||
|
|
|
£'000 |
£'000 |
£'000 |
||
|
|
|
|
|
|
||
|
Capital losses on investments |
|
|
|
|
||
|
Losses on investments held at fair value through profit or loss |
|
- |
(27,431) |
(27,431) |
||
|
Revenue |
|
|
|
|
||
|
Investment income |
|
4,836 |
- |
4,836 |
||
|
|
|
|
|
|
||
|
Total income |
|
4,836 |
(27,431) |
(22,595) |
||
|
|
|
|
|
|
||
|
Expenditure |
|
|
|
|
||
|
Investment management fee |
|
(227) |
(529) |
(756) |
||
|
Other expenses |
|
(467) |
- |
(467) |
||
|
|
|
|
|
|
||
|
Total expenditure |
|
(694) |
(529) |
(1,223) |
||
|
|
|
|
|
|
||
Profit/(loss) before finance costs and tax |
|
4,142 |
(27,960) |
(23,818) |
||
|
|
|
|
|
|
||
|
Finance costs |
|
|
|
|
||
|
Interest on bank loan |
|
(62) |
(144) |
(206) |
||
|
|
|
|
|
|
||
|
Total finance costs |
|
(62) |
(144) |
(206) |
||
|
|
|
|
|
|
||
|
Profit/(loss) before tax |
|
4,080 |
(28,104) |
(24,024) |
||
|
Taxation |
|
(27) |
- |
(27) |
||
|
|
|
|
|
|
||
|
Profit/(loss) and total comprehensive income/(expense) for the year |
|
4,053 |
(28,104) |
(24,051) |
||
|
|
|
|
|
|
||
|
Earnings per share |
2 |
3.46p |
(23.99)p |
(20.53)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 discontinued in the year.
Statement of Financial Position (audited)
as at 31 March
|
|
|
2021 |
2020 |
|||
|
|
|
Note |
£'000 |
|
£'000 |
|
|
Non-current assets |
|
|
|
|
|
|
|
Investments held at fair value through profit or loss |
|
|
123,249 |
|
92,587 |
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Receivables |
|
|
990 |
|
938 |
|
|
Cash and cash equivalents |
|
|
2,310 |
|
4,003 |
|
|
|
|
|
3,300 |
|
4,941 |
|
|
Total assets |
|
|
126,549 |
|
97,528 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Payables |
|
|
(542) |
|
(507) |
|
|
Bank loan |
|
|
(3,500) |
|
- |
|
|
|
|
|
(4,042) |
|
(507) |
|
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
|
Bank loan |
|
|
(7,500) |
|
(7,500) |
|
|
|
|
|
(7,500) |
|
(7,500) |
|
|
Total liabilities |
|
|
(11,542) |
|
(8,007) |
|
|
Net assets |
|
|
115,007 |
|
89,521 |
|
|
Equity attributable to equity shareholders |
|
|
|
|
|
|
|
Share capital |
|
|
134 |
|
134 |
|
|
Share premium |
|
|
153 |
|
153 |
|
|
Capital redemption reserve |
|
|
5 |
|
5 |
|
|
Buy back reserve |
|
|
80,394 |
|
81,157 |
|
|
Special capital reserve |
|
|
13,340 |
|
14,945 |
|
|
Capital reserves |
|
|
16,392 |
|
(12,907) |
|
|
Revenue reserve |
|
|
4,589 |
|
6,034 |
|
|
Equity shareholders' funds |
|
|
115,007 |
|
89,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per Ordinary share |
|
6 |
99.25p |
|
76.66p |
|
|
Net asset value per B share |
|
6 |
99.25p |
|
76.66p |
|
Cash Flow Statement (audited)
for the year to 31 March
|
|
|
|
|
|
Year to 31 March 2021 |
Year to 31 March 2020 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Cash flows from operating activities |
|
|
|
Profit/(Loss) before taxation |
32,326 |
(24,024) |
|
Adjustments for: |
|
|
|
(Gains)/losses on investments held at fair value through profit or loss |
(29,988) |
27,431 |
|
Exchange losses |
35 |
- |
|
Interest income |
(1) |
(23) |
|
Interest received |
1 |
23 |
|
Dividend income |
(3,787) |
(4,813) |
|
Dividend income received |
3,638 |
5,428 |
|
Decrease/(increase) in receivables |
8 |
(16) |
|
Increase/(decrease) in payables |
33 |
(47) |
|
Finance costs |
229 |
206 |
|
Overseas tax suffered |
(21) |
(55) |
|
Cash flows from operating activities |
2,473 |
4,110 |
|
Cash flows from investing activities Purchases of investments Sales of investments |
(19,430) 18,849 |
(19,784) 25,201 |
|
Cash flows from investing activities |
(581) |
5,417 |
|
Cash flows before financing activities |
1,892 |
9,527 |
|
Cash flows from financing activities |
|
|
|
Dividends paid on Ordinary shares |
(4,465) |
(4,452) |
|
Capital returns paid on B shares |
(1,605) |
(1,595) |
|
Shares purchased for treasury |
(763) |
(486) |
|
Interest on bank loans |
(217) |
(195) |
|
Drawdown of loan |
3,500 |
- |
|
Cash flows from financing activities |
(3,550) |
(6,728) |
|
|
|
|
|
Net (decrease)/increase in cash and cash equivalents |
(1,658) |
2,799 |
|
Cash and cash equivalents at the beginning of the year |
4,003 |
1,204 |
|
Effect of movement in foreign exchange |
(35) |
- |
|
Cash and cash equivalents at the end of the year |
2,310 |
4,003 |
|
Represented by: |
|
|
|
Cash at bank |
161 |
204 |
|
Short term deposits |
2,149 |
3,799 |
|
|
2,310 |
4,003 |
Statement of Changes in Equity (audited)
for the year to 31 March 2021
|
|
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 31 March 2020 |
134 |
153 |
5 |
81,157 |
14,945 |
1,819 |
(14,726) |
6,034 |
89,521 |
|
Movement during the year ended 31 March 2021 |
|
|
|
|
|
|
|
|
|
|
Profit for the year |
- |
- |
- |
- |
- |
1,264 |
28,035 |
3,020 |
32,319 |
|
Total comprehensive income for the year |
- |
- |
- |
- |
- |
1,264 |
28,035 |
3,020 |
32,319 |
|
Transactions with owners of the Company recognised directly in equity |
|
|
|
|
|
|
|
|
|
|
Shares bought back for treasury |
- |
- |
- |
(763) |
- |
- |
- |
- |
(763) |
|
Dividends paid on Ordinary shares |
- |
- |
- |
- |
- |
- |
- |
(4,465) |
(4,465) |
|
Capital returns paid on B shares |
- |
- |
- |
- |
(1,605) |
- |
- |
- |
(1,605) |
|
Balance as at 31 March 2021 |
134 |
153 |
5 |
80,394 |
13,340 |
3,083 |
13,309 |
4,589 |
115,007 |
Statement of Changes in Equity (audited)
for the year to 31 March 2020
|
|
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 31 March 2019 |
134 |
153 |
5 |
81,643 |
16,540 |
(29) |
15,226 |
6,433 |
120,105 |
|
Movement during the year ended 31 March 2020 |
|
|
|
|
|
|
|
|
|
|
Profit/(loss) for the year |
- |
- |
- |
- |
- |
1,848 |
(29,952) |
4,053 |
(24,051) |
|
Total comprehensive income/(expense) for the year |
- |
- |
- |
- |
- |
1,848 |
(29,952) |
4,053 |
(24,051) |
|
Transactions with owners of the Company recognised directly in equity |
|
|
|
|
|
|
|
|
|
|
Shares bought back for treasury |
- |
- |
- |
(486) |
- |
- |
- |
- |
(486) |
|
Dividends paid on Ordinary shares |
- |
- |
- |
- |
- |
- |
- |
(4,452) |
(4,452) |
|
Capital returns paid on B shares |
- |
- |
- |
- |
(1,595) |
- |
- |
- |
(1,595) |
|
Balance as at 31 March 2020 |
134 |
153 |
5 |
81,157 |
14,945 |
1,819 |
(14,726) |
6,034 |
89,521 |
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 companies investing primarily in listed securities.
A summary of the Company's internal controls and risk management arrangements is included within the Report of the Audit Committee in the Annual Report. By means of the procedures set out in that summary, the Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. Any emerging risks that are identified and that are considered to be of significance would be included on the Company's risk radar with any mitigations. These significant risks, emerging risks and other risks, are regularly reviewed by the Audit Committee and the Board. Consideration has been given to the impact from Coronavirus (COVID-19) and is referred to in Financial Risk. Additionally, Operational Risk has been expanded to include pandemic risks. It has also regularly reviewed the effectiveness of the Company's risk management and internal control systems for the period.
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.
Since early 2020 there has been increased uncertainty in markets due to the effect of COVID-19 which has led to volatility in the Company's NAV.
Climate change is likely to have an impact on some of our investee companies in the coming years potentially affecting their operating models for example, supply chains and energy costs. The effects have yet to be fully understood.
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 in detail at each meeting with the Manager.
Engagement on environmental, social and governance matters is undertaken by
the Manager.
The effect of COVID-19 on the markets and which has contributed to significant volatility is discussed in the Chairman's Statement and Manager's Review. As a closed-end investment trust the Company is not constrained by asset sales to meet redemptions and is well suited to investors seeking longer term returns and to remain invested through volatile market conditions.
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 the 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 ongoing charges 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.
This risk includes failures or disruption as a consequence of external events such as the current COVID-19 pandemic.
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 and the contract can be terminated with six months' notice. BMO GAM has a business continuity plan in place to ensure that it is able to respond quickly and effectively to an unplanned event that could affect the continuity of its business.
BMO GAM has outsourced trade processing, valuation and middle office tasks and systems to State Street Bank and Trust Company ('State Street') and supervision of such third party service providers, including SS&C who administer the BMO savings plans, has been maintained by BMO GAM. This includes the review of IT security and heightened cyber threats.
As a consequence of the COVID-19 pandemic and the measures put in place by the UK government, since March 2020 the Manager has implemented working from home arrangements for its staff and in accordance with contingency plans designed to safeguard its employees, continue serving clients and keep operations running effectively and in compliance with its regulatory obligations. The arrangements have operated without incident or interruption. The Manager closely monitored the performance of its technology platform which operated within acceptable control levels. The Company's other third party service providers have also implemented similar arrangements to ensure no disruption to their service. Having considered these arrangements and reviewed the service levels over the last year, the Board is confident that the Company continues to operate as normal and expected service levels will be maintained.
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 assets that constitute financial instruments under the AIFMD.
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.
· The operational robustness of key service providers and the effectiveness of business continuity plans in place in particular given the current impact of COVID-19.
· That alternative service providers could be engaged at relatively short notice if required.
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. This included the impact of COVID-19 and the impact of a significant fall in equity markets on the Company's investment portfolio. 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 the notes 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 1.04% 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,
· Whether the Company's objective and policy continue to be relevant to investors and
· The effect of significant future falls in investment values and the ability to maintain dividends and capital repayments, particularly given the impact of the COVID-19 pandemic and its impact on the global economy
These matters were assessed over a five year period to May 2026, and the Board will continue to assess viability over five year rolling periods. As part of this assessment the Board considered a number of stress tests and scenarios which considered the impact of severe stock market volatility on shareholders' funds over a five year period. The results demonstrated the impact on the Company's net assets and its expenses and its ability to meet its liabilities over that period. 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 2026.
Statement of Directors' Responsibilities in Relation to the Annual Report and Financial Statements
The Directors confirm, in respect of the Annual Report and financial statements for the year ended 31 March 2021 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, give a true and fair view of the assets, liabilities, financial position and return of the Company;
· the Strategic Report 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; and
· 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.
On behalf of the Board
John M. Evans
Chairman
24 May 2021
Notes (audited)
1. The financial statements of the Company which are the responsibility of, and were approved by, the Board on 24 May 2021, have been prepared on a going concern basis 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.
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 or 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 £32,319,000 (year to 31 March 2020 loss: £24,051,000) and on 85,648,406 Ordinary shares (2020: 86,199,196) and 30,802,860 B shares (2020: 30,924,172), 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 £3,020,000 (year to 31 March 2020: £4,053,000) and on the weighted average number of shares in issue as above.
The Company's capital earnings per share are based on the capital profit for the year of £29,299,000 (year to 31 March 2020 loss: £28,104,000) and on the weighted average number of shares in issue as above.
3. A fourth interim dividend in respect of the year ended 31 March 2021 of 1.43p per Ordinary share was paid on 7 May 2021 to Ordinary shareholders on the register on 6 April 2021. A fourth capital repayment in respect of the year ended 31 March 2021 of 1.43p per B share was paid on 7 May 2021 to B shareholders on the register on 6 April 2021.
4. The Company has a £7.5 million unsecured term loan from Scotiabank Europe plc until 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. £3.5 million of the RCF was drawn down at 31 March 2021 (£nil at 31 March 2020). 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 750,000 Ordinary Shares (2020: 405,491 Ordinary shares) to hold in treasury at a cost of £634,000 (2020: £379,000) and 150,000 B shares (2020: 117,953 B shares) to hold in treasury at a cost of £129,000 (2020: £107,000).
At 31 March 2021 the Company held 16,894,491 Ordinary Shares (2020: 16,144,491 Ordinary shares) and 1,367,953 B shares (2020: 1,217,953 B shares) in treasury.
6. The Company's basic net asset value per share of 99.25p (2020: 76.66p) is based on the equity shareholders' funds of £115,007,000 (2020: £89,521,000) and on 115,881,403 equity shares, consisting of 85,172,653 Ordinary Shares and 30,708,750 B Shares (2020: 116,781,403 equity shares, consisting of 85,922,653 Ordinary Shares and 30,858,750 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 2021 was therefore 397.00p (2020: 306.64p).
The Company's treasury net asset value per share, incorporating the 16,894,491 Ordinary Shares and 1,367,953 B Shares held in treasury at the year end (2020: 16,144,491 Ordinary Shares and 1,217,953 B Shares), was 99.25p (2020: 76.16p). The Company's treasury net asset value per unit at the end of the year was 397.00p (2020: 304.64p). The Company's current policy is to only re‑sell shares held in treasury at a price not less than the net asset value per share. Prior to the AGM in 2020 the Company was able to 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 at 31 March 2020, such treasury shares were valued at the higher of net asset value less 5 per cent and the mid market share price at 31 March 2020.
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 current year or prior year. 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 2021 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 loans 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 0.1 per cent at 31 March 2021 (2020: 0.1 per cent).
Fixed rate
At 31 March 2021 and 31 March 2020, the Company's Investment Portfolio did not contain any fixed interest or floating rate interest assets. At 31 March 2021 and 31 March 2020, 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 value of these investments exceeds the Company's liabilities by a significant margin. 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.
The Directors believe having assessed the principal risks and other matters, including the COVID-19 pandemic and in light of the controls and review processes noted above and bearing in mind the nature of the Company's business and assets and revenue and expenditure projections, that the Company has adequate resources to continue in operational existence for a period of at least twelve months from the date of approval of the financial statements. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
9. The Directors of the Company are considered a related party. There are no transactions with the Board other than aggregated remuneration for services as Directors as disclosed in the Directors' Remuneration Report within the financial statements. There are no outstanding balances with the Board at year end. The beneficial interests of the Directors in the Ordinary shares and B shares of the Company are disclosed in the Annual Report and Financial Statements.
Transactions between the Company and BMO Investment Business Limited are detailed in the notes to the financial statements. The existence of an independent Board of Directors demonstrated that the Company is free to pursue its own financial and operating policies and therefore under the AIC SORP, the Manager is not considered a related party.
10. This statement was approved by the Board on 24 May 2021. 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 2021 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 2021 and will be available for inspection at 6th 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 2021 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 27 July 2021.
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.
|
|
|
At 31 March 2021 |
||
|
|
|
Ordinary shares |
B shares |
Units |
|
Net asset value per share |
(a) |
99.25p |
99.25p |
397.00p |
|
Share price |
(b) |
91.5p |
91.5p |
365.00p |
|
(Discount) (c=(b-a)/(a)) |
(c) |
-7.8% |
-7.8% |
-8.1% |
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 2021 £'000 |
|
|
Total expenditure |
|
1,186 |
|
|
Less revolving credit facility commitment fee |
|
(32) |
|
|
Less non-recurring expenses |
|
(51) |
|
|
Total |
(a) |
1,103 |
|
|
Average daily net assets |
(b) |
105,838 |
|
|
Ongoing charges (c = a/b) |
(c) |
1.04% |
|
Gearing - represents the excess amount above shareholders' funds of total investments, expressed as a percentage of the shareholders funds. If the amount calculated is negative, this is a 'net cash' position and no gearing.
|
|
|
31 March 2021 £'000 |
|
Investments held at fair value through profit or loss |
(a) |
123,249 |
|
Net assets |
(b) |
115,007 |
|
Gearing (c = (a/b)-1)% |
(c) |
7.2% |
Total return - the theoretical return to shareholders calculated on a per share basis by adding dividends/capital repayments paid in the period to the increase or decrease in the Share Price or NAV in the period. The dividends/capital repayments 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/capital repayments on the respective ex‑dividend dates and the share price total returns and NAV total returns are shown below.
|
|
31 March 2021 |
|
|
|
Ordinary shares/ B shares |
Units |
|
NAV per share at start of financial year |
76.66p |
306.64p |
|
NAV per share at end of financial year |
99.25p |
397.00p |
|
Change in the year |
29.5% |
29.5% |
|
Impact of dividend/capital repayment reinvestment† |
8.0% |
8.0% |
|
NAV total return for the year |
37.4% |
37.4% |
†During the year to 31 March 2021 dividends/capital repayments totalling 5.21p (Ordinary shares/B shares) and 20.84p (units) went ex dividend.
|
|
31 March 2021 |
||
|
|
Ordinary shares |
B shares |
Units |
|
Share price per share at start of financial year |
69.5p |
67.5p |
273.0p |
|
Share price per share at end of financial year |
91.5p |
91.5p |
365.0p |
|
Change in the year |
31.7% |
35.6% |
33.7% |
|
Impact of dividend/capital repayment reinvestment† |
9.1% |
9.3% |
6.9% |
|
Share price total return for the year |
40.8% |
44.9% |
40.6% |
†During the year to 31 March 2021 dividends/capital repayments totalling 5.21p (Ordinary shares/B shares) and 20.84p (units) went ex dividend.
Yield - The total annual dividend/capital repayment expressed as a percentage of the year end share price.
|
|
|
31 March 2021 |
||
|
|
|
Ordinary shares |
B shares |
Units |
|
Annual dividend/capital repayment |
(a) |
5.30p |
5.30p |
21.20 |
|
Share price |
(b) |
91.5p |
91.5p |
365.0p |
|
Yield = (c=a/b) |
(c) |
5.8% |
5.8% |
5.8% |
For further information, please contact:
Philip Webster
Fund Manager to BMO UK High Income Trust PLC Tel: 0207 628 8000
Ian Ridge
For BMO Investment Business Limited
Company Secretary to BMO UK High Income Trust PLC Tel: 0207 628 8000
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