Annual Financial Report

RNS Number : 5943J

BMO Capital & Income Inv Tst PLC

06 December 2018

 

Date:                6 December 2018

Contact:          Julian Cane                                                   

                        BMO Investment Business Limited                 

                        020 7628 8000                                               

LEI:                  21380052ETTRKV2A6Y19

BMO Capital and Income Investment Trust PLC

(Formerly F&C Capital and Income Investment Trust PLC)

Audited Statement of Results

for the year ended 30 September 2018

Highlights

·      Share price total return for the year was 5.3%, with an average premium to Net Asset Value of 2.1%.

·      Total ordinary dividends of 10.95 pence per share - an increase of 2.8% over the previous year and the 25^th consecutive annual increase.

·      Net Asset Value total return for the year was 5.5%, slightly underperforming the benchmark FTSE All-Share Index return of 5.9%.

"Over the five-year period, the Company generated a Net Asset Value total return of 54.7% while the benchmark rose 43.5%. The Company's return equates to 9.1% per annum, which is very respectable in the historic context."

Steve Bates

Chairman

Summary of results

Attributable to Shareholders	30 September 2018	30 September 2017	% Change
Share price total return	5.3%	15.8%	n/a
Net asset value per share total return	5.5%	16.6%	n/a
Benchmark* total return	5.9%	11.9%	n/a
Net asset value per share	324.04p	317.11p	+2.2
Revenue return per share	11.70p	11.71p	-0.1
Dividends per share	10.95p	10.65p	+2.8
Share price	327.00p	321.00p	+1.9
Net asset value (£'000s)	327,472	312,463	+4.8
On-going charges	0.58%	0.59%	n/a

*FTSE All-Share Index

Chairman's Statement

Over the years since the global financial crisis, we have all become used to very low interest rates, somewhat anaemic economic activity and sluggish inflation. Because all this has coincided with a loose monetary policy, there has been a lot of liquidity sloshing around, and much of this has flowed into financial assets. As a result, stock markets have delivered very good returns to investors, who have perhaps become complacent about this state of affairs continuing indefinitely. Indeed, much of the first half of our fiscal year stuck to this playbook. Under the surface, though, things were beginning to shift. A series of small hikes in US interest rates, although heavily telegraphed, eventually unsettled markets and set off a period of volatility in the spring. We have recently experienced a further episode of discomfort, which stems from the same source: the US economy is strong, giving succour to the hawks involved in monetary policy that interest rates should 'normalise', which means more rises. Against this background, we have a smorgasbord of geopolitical unpleasantness to worry about and, despite fairly robust corporate performance around the world, this has led to further dyspepsia.

In the UK, we have had our own demons. With Government effectively paralysed by Brexit and the economy underperforming its developed peers, markets have had to cope with an uncomfortable degree of uncertainty. Signs of wage inflation rippled through labour markets and despite an absence of underlying economic strength, interest rates were raised over the summer. We are stuck in an uncomfortable limbo with very little visibility about either our political or economic future. In the circumstances, it is remarkable that the market has held up and is a testament both to the global nature of the UK stock market and to corporate resilience.

Performance

This year, the Net Asset Value ("NAV") per share on a total return basis rose 5.5%. The FTSE All-Share Index, our primary Benchmark, rose 5.9% on the same basis. It is perhaps worth noting that the return in the first half of the Company's fiscal year was zero, so all of this return came between the end of March and the end of September, even as the political situation in our green and pleasant land became even more difficult and more antagonistic to business. Over the five-year period, the Company generated a NAV total return of 54.7% while the Benchmark rose 43.5%. The Company's return equates to 9.1% per annum, which is very respectable in the historic context.

I have bored for Britain in past statements about how important it is to look at the longer term data as well, and here the numbers remain excellent. Over 20 years, for example, the share price total return was 378.3%, the NAV total return was 303.7% while the Benchmark on a comparative basis was 241.7%. Julian Cane, your Fund Manager remains at the controls, as has been the case for the whole of this period. He has done an excellent job throughout and the Board wishes to extend its gratitude to him and express its confidence that he will continue to deliver for you, the Shareholders.

Gearing and Attribution

During the year, our gearing averaged about 5%. As the markets rose, this was a modest net positive contributor to return to the extent of around 20-30 basis points, depending on the analytical methodology chosen. In March we replaced our loan facility with a new £30m facility, of which £10 million remains undrawn.

Income Account

The revenue return per share was 11.7 pence, more or less unchanged from last year's outcome. The underlying flow of income into the portfolio was affected by a mixture of special dividends and changes in exchange rates, and also reflects some rebalancing from high dividend payers with static prospects into lower yielding, faster growing holdings.

This year so far, we have paid three interim dividends of 2.45 pence per share, amounting to a total of 7.35 pence per share. We are proposing to pay a fourth interim dividend of 3.60 pence per share, bringing the total for the year to 10.95 pence, an increase of 2.8% over the previous year, and ahead of the Consumer Price Index, which rose 2.4% in the year to the end of September. The fourth payment will be paid on 28 December 2018. As usual, it will be in the form of an interim which can be paid earlier than would be the case had we declared a final dividend, which would need approval at the Annual General Meeting ("AGM") in February. This is the 25th consecutive year of increased dividends for the Company, and the payment has risen from 3.4 pence in 1993 to its current level, a rise of 222%. We are very pleased that The Association of Investment Companies ("AIC"), our industry body, has awarded us the status of "Dividend Hero".

On the cost side of the income statement, our ongoing charges ratio ("OCR") is 0.58%; marginally below where it was last year and well below the AIC sector average of 0.67%. It is competitive with other actively managed products, but no doubt higher than an ETF or other passive vehicle. I would point out, of course, that your Company has delivered performance well in excess of the benchmark over many years net of all expenses and so has been a good advert for the much maligned active approach to investment.

Premium/Discount

Over the course of the year, the shares of the Company have traded at an average premium of 2.1% over NAV. The shares traded very briefly at a discount during the year, with the range varying from a premium of 5.1% to a discount of 0.2%. This is pretty much in line with the historical experience. Over the last five years, the average has been a premium of 2.2%, within a range of -1.4% to +7.5%. The premium has allowed us to issue 2,525,000 new shares this year, for an additional capital contribution of £8.2 million. This was equivalent to 2.6% of our starting share count. These shares are always issued at a premium large enough to avoid the risk of diluting the NAV for existing Shareholders and the new capital contributes to a larger asset base over which to spread our fixed costs. To this end, your Board believes that the continuing issuance of shares in this manner is in your interests.

Unlike death and taxes, the existence of a premium is not guaranteed. It mostly reflects the attraction to investors of a company paying a reasonably high yield through a growing dividend stream in an environment where conventional savings in a bank or building society offer very little. If this changes and we find ourselves at a persistent discount in normal market conditions, we will be assiduous in buying back our shares in order to minimise damage.

At the AGM in February, we will as usual be asking for authority to issue further shares without pre-emption rights equal to 10% of the Company's shares in issue at the date of this report. As explained earlier, these can only be issued at a premium which takes into account the need not to dilute existing Shareholders. The Board believes this resolution is in your interests and urges you to support it.

Name Change

On 9 November 2018, we announced that we had decided to change the name of the Company to BMO Capital and Income Investment Trust PLC. Name changes can hold a lot of emotional baggage and in our case, there was concern that we were turning our back on a long heritage under the F&C banner. BMO, which is a very large North American bank and asset manager, bought F&C in 2014 and since then has been integrating the business into its larger asset management operations. As part of its development plans, and no doubt with the aim of becoming better known as a brand in the UK market, BMO decided to rebrand F&C's savings plans with the BMO prefix. The Board carefully considered the appropriate course of action and decided that it would be confusing for Shareholders if the savings plans had one brand while we as a Company had another. If we had stuck with the status quo, we would also lose the benefits of any promotional spend which BMO has committed to the savings plans and to its brand more generally. There will be no cost to the Company involved in this exercise and the most important thing from the Board's perspective is that the investment process and the Fund Manager will not change at all.

Governance

There is usually something to say on this topic and this year we were obliged to introduce something called a Key Information Document ("KID"). This sensible sounding development has ended up being rather controversial as it uses a prescribed methodology for calculating returns under various investment scenarios. Because the markets have lacked volatility in recent years, the mathematics behind the algorithm can produce some bizarre (and often unrealistically positive) outcomes. In our case, the menu of possible outcomes looks plausible, but I would urge Shareholders to note that the numbers in the document are the result of the way the formula works which may or may not have anything to do with reality. The idea behind the KID was to allow investors easy comparison across different products, but so far, they are not compiled for open ended funds, which have much lighter reporting requirements. The Financial Conduct Authority, which regulates the investment industry, is reviewing KIDs at the moment and there may be some changes to the regime in due course.

The AGM of the Company will take place on 12 February 2019. Julian will be making his customary presentation on the investment scene, and all the Directors will be present to answer any questions you may have.

Outlook

As I write, markets are suffering another bout of jitters. Sometimes, this seems to be because economic activity is too strong, which means more rate rises; sometimes it's because economies are too weak, which means pressure on corporate profits; and sometimes it's because something unpleasant has happened to Italy, or China or Brexit or free trade. In any event, the economic expansion and the bull market which has accompanied it, is quite long in the tooth. Bull markets, though, do not die of old age. They generally finish on the back of a liquidity squeeze caused by higher interest rates. While this outturn looks feasible in the US where the economy has done much better than other developed countries and where the stock market has done exceptionally well, the likelihood of much higher interest rates on this side of the Atlantic is remote. In the UK, we still do not know what will happen on Brexit and the level of uncertainty posits an accommodative monetary policy. Other things being equal, this is positive for equity markets, but we can expect any upward trend to be interrupted by periods of uncomfortable volatility as the politics unfold and the cycle matures.

Steven Bates

Chairman

5 December 2018

 

Principal Risks and Future Prospects

The principal risks and their mitigations are described below. Note 22 of the Report and Accounts details the Financial Risk Management of the Company. The risks that affect the Company's ongoing operations may vary in significance from time to time. The principal risks identified as most relevant to the assessment of the Company's future prospects and viability were those relating to potential investment portfolio under-performance and its effect on the share price; discount movement; dividends; and threats to security over the Company's assets.

·      Risk description:  Inappropriate business  or marketing strategy particularly in relation to investor needs giving rise to a share price discount to net asset value per share. Unchanged throughout the year under review.

Mitigation: The Board holds a separate meeting each year to consider strategic issues.  Market intelligence is obtained via the Company's Broker. The effectiveness of the marketing strategy is also reviewed at each Board meeting. Shareholder satisfaction surveys are conducted at least every five years ahead of the Company's continuation vote. Share buyback can be be employed to help moderate extensive discount volatility.

·      Risk description: Unfavourable markets or asset allocation, sector and stock selection and use of gearing and derivatives are inappropriate giving rise to investment underperformance as well as impacting capacity to pay dividends. Unchanged throughout the year under review. 

Mitigation: The portfolio of quoted securities is diversified and the Company's structure enables it to take a long-term view. Investment policy, performance, revenue and gearing are reviewed at each Board meeting. BMO GAM's Performance and Risk Oversight team provides independent oversight on investment risk management. The Board regularly considers operating costs along with underlying dividend income and the implications for the dividend payment capacity of the Company.

·      Risk description: Errors, fraud or control failures at service providers or loss of data through increasing cyber threats or business continuity failure could damage reputation or investors' interests or result in losses. Risk of cyber attacks increased in the year under review.

Mitigation: The Board receives regular control reports from BMO GAM covering risk and compliance including oversight of third party service providers. The Board has access to their Head of Business Risk and requires any significant issues directly relevant to the Company to be reported immediately. The Depositary is specifically liable for loss of any of the Company's securities and cash held in custody.

 

Rolling Three Year Viability Horizon

When considering the risk of under-performance, the Board assessed and evaluated the following areas through a series of stress tests ranging from moderate to extreme scenarios:

• potential illiquidity of the Company's portfolio;

• the effects of any substantial future falls in investment values and income receipts on the ability to repay and re-    negotiate borrowings;

• potential breaches of loan covenants, the maintenance of dividend payments and retention of investors; and

• the potential need for extensive share buybacks in the event of share price volatility and a move to a wide discount.

Based on its assessment and evaluation of the Company's future prospects, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the coming three years; the Company's business model, strategy and the embedded characteristics have helped define and maintain the stability of the Company since inception. The Board expects this to continue and will assess viability over subsequent three year rolling periods.

 

Statement of Directors' Responsibilities  
 

In accordance with Chapter 4 of the Disclosure and Transparency Rules the Directors confirm, that to the best of their knowledge:

·      the financial statements, prepared in accordance with applicable accounting standards give a true and fair view of the assets, liabilities, financial position and profit of the Company;

·      the Strategic report includes 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

·      the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

On behalf of the Board

Steven Bates

Chairman

5 December 2018

 

Income Statement

for the year ended 30 September	2018			2017
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	6,841	6,841	-	34,881	34,881
Foreign exchange gains/(losses)	5	(6)	(1)	8	(7)	1
Income	13,143	-	13,143	12,767	-	12,767
Management fee	(688)	(688)	(1,376)	(637)	(637)	(1,274)
Other expenses	(519)	(11)	(530)	(499)	(19)	(518)
Net return before finance costs and taxation	11,941	6,136	18,077	11,639	34,218	45,857
Finance costs	(223)	(223)	(446)	(283)	(283)	(566)
Net return on ordinary activities before taxation	11,718	5,913	17,631	11,356	33,935	45,291
Taxation on ordinary activities	(8)	-	(8)	103	-	103
Net return attributable to Shareholders	11,710	5,913	17,623	11,459	33,935	45,394
Return per share - pence	11.70	5.90	17.60	11.71	34.69	46.40

The total column of this statement is the profit and loss account of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

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

A statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.

 

Statement of Changes in Equity

for the year ended 30 September 2018
		Share	Capital				Total
	Share	premium	redemption	Special	Capital	Revenue	Shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 September 2017	24,634	117,822	4,146	4,434	149,140	12,287	312,463
Movements during the year      ended 30 September 2018
Dividends paid	-	-	-	-	-	(10,803)	(10,803)
Ordinary shares issued	631	7,558	-	-	-	-	8,189
Net return attributable to     Shareholders	-	-	-	-	5,913	11,710	17,623
Balance at 30 September 2018	25,265	125,380	4,146	4,434	155,053	13,194	327,472

for the year ended 30 September 2017
		Share	Capital				Total
	Share	premium	redemption	Special	Capital	Revenue	Shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 September 2016	24,196	112,997	4,146	4,434	115,205	11,049	272,027
Movements during the year      ended 30 September 2017
Dividends paid	-	-	-	-	-	(10,221)	(10,221)
Ordinary shares issued	438	4,825	-	-	-	-	5,263
Net return attributable to     Shareholders	-	-	-	-	33,935	11,459	45,394
Balance at 30 September 2017	24,634	117,822	4,146	4,434	149,140	12,287	312,463

 

Balance Sheet

at 30 September	2018	2017
	£'000s	£'000s
Fixed assets
Investments	341,034	326,719
Current assets
Debtors	1,582	1,215
Cash and cash equivalents	5,246	4,962
Total current assets	6,828	6,177
Current liabilities
Creditors: amounts falling due within one year	(390)	(433)
Loans	(20,000)	(20,000)
Total current liabilities	(20,390)	(20,433)
Net current liabilities	(13,562)	(14,256)
Net assets	327,472	312,463
Capital and reserves
Share capital	25,265	24,634
Share premium account	125,380	117,822
Capital redemption reserve	4,146	4,146
Special reserve	4,434	4,434
Capital reserves	155,053	149,140
Revenue reserve	13,194	12,287
Total Shareholders' funds	327,472	312,463
Net asset value per ordinary share - pence	324.04	317.11

 

Statement of Cash Flows

for the year ended 30 September	2018	2017
	£'000s	£'000s
Cash flows from operating activities before dividends received and interest paid	(1,830)	(1,583)
Dividends received	12,664	12,674
Interest paid	(450)	(569)
Cash flows from operating activities	10,384	10,522
Investing activities
Purchase of investments	(42,351)	(34,559)
Sales of investments	34,877	39,315
Other capital charges	(11)	(19)
Cash flows from investing activities	(7,485)	4,737
Cash flows before financing activities	2,899	15,259
Financing activities
Equity dividends paid	(10,803)	(10,221)
Net proceeds from issuance of new shares	8,189	5,263
Drawdown of loans	20,000	-
Repayment of loans	(20,000)	(5,000)
Cash flows from financing activities	(2,614)	(9,958)
Net movement in cash and cash equivalents	285	5,301
Cash and cash equivalents at the beginning of the year	4,962	(340)
Effect of movement in foreign exchange	(1)	1
Cash and cash equivalents at the end of the year	5,246	4,962
Represented by:
Cash at bank	5,246	4,962

 

Notes

1   Return per ordinary share

Revenue return

The revenue return per share of 11.70p (2017: 11.71p) is based on the revenue return attributable to Shareholders of £11,710,000 profit (2017: £11,459,000 profit).

Capital return

The capital return per share of 5.90p (2017: 34.69p) is based on the capital return attributable to Shareholders of £5,913,000 profit (2017: £33,935,000 profit).

Total return

The total return per share of 17.60p (2017: 46.40p) is based on the total return attributable to Shareholders of £17,623,000 profit (2017: £45,394,000 profit).

Weighted average ordinary shares in issue

The returns per share are based on a weighted average of 100,117,008 (2017: 97,835,501) ordinary shares in issue during the year.

2   Dividends

The Directors have declared a fourth interim dividend in respect of the year ended 30 September 2018 of 3.60 pence per share, payable on 28 December 2018 to all Shareholders on the register at close of business on 14 December 2018.

3   Financial risk management

The Company is an investment company, listed on the London Stock Exchange, and conducts its affairs so as to qualify in the United Kingdom ("UK") as an investment trust under the provisions of section 1158 of the CTA. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of investments.

The Company's investment objective is to secure long-term capital and income growth from a portfolio consisting mainly of FTSE All-Share companies. The Company can also have exposure to leading overseas companies, with the value of the non-UK portfolio not exceeding 10% of the Company's gross assets. In pursuing this objective, the Company is exposed to financial risks which could result in a reduction of either or both of the value of the net assets and the profits available for distribution by way of dividend. These financial risks are principally related to the market (currency movements, interest rate changes and security price movements), liquidity and credit. The Board, together with the

Manager, is responsible for the Company's risk management.

The full details of financial risks are contained in note 22 of the Report and Accounts.

4    Annual general meeting

The annual general meeting will be held at the registered office of the Company, Exchange House, Primrose Street, London EC2A 2NY on Tuesday 12 February 2019 at 11.30 a.m.

5    Report and accounts

The report and accounts for the year ended 30 September 2018 will be posted to Shareholders and made available on the website www.bmocapitalandincome.com shortly. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

By order of the Board

BMO Investment Business Limited, Secretary

5 December 2018

 

END

 

 

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