BHI.L Regulatory News (BHI)

To: RNS

From: BMO UK High Income Trust PLC

Date: 29 May 2020

LEI: 213800B7D5D7RVZZPV45

· Total distributions increased by 3.4% to 5.21p per share compared to the prior year. Distribution yield(1) of 7.5% on Ordinary shares and 7.7% on B shares at 31 March 2020, compared to the yield on the FTSE All-Share Index of 5.5%.

· Net asset value total return per share for the year was -21.4%, compared to the Benchmark(2) total return of -18.5%.

· Ordinary share price total return(1) per share for the year was -22.8%, compared to the Benchmark(2) total return of -18.5%.

· B share price total return per share for the year was -25.0%, compared to the Benchmark(2) total return of -18.5%.

(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.

In the unanticipated and testing circumstances that currently exist it is appropriate to deal with issues that will be of most concern to shareholders before reviewing the returns for the year to 31 March 2020.

First, I wish to reassure Shareholders that the continuity arrangements of your Investment Manager, BMO GAM, have worked well and that your portfolio has been actively managed throughout the entire period of the Coronavirus ("COVID-19") related disruption to working practices. I can also report that the Board is satisfied that the continuity arrangements of all key suppliers including the registrar, depositary, custodian and auditor are working well.

In its response to the introduction of severe restrictions on economic and social activity necessary to fight the COVID-19 pandemic, the UK Government has made available enormous sums to reimburse companies for the earnings and wages of staff who have been furloughed. It is entirely understandable why companies that are beneficiaries of such public funding and have seen the livelihood of their employees and other stakeholders severely impacted should choose to cancel, delay or significantly reduce the dividend payments that they make to shareholders. In addition, companies have chosen not to pay dividends in the short term to conserve cash at a time when cash flow is severely reduced. Finally, financial regulators in the UK made it clear that they did not expect certain financial companies to be paying dividends under current circumstances.

Possible scenarios for UK dividends in 2020 were recently provided by Link Group and estimations for falls ranged from 27% to 51%. This is a quantum of decline significantly greater than that seen in 2008 and 2009 during the financial crisis. Furthermore, there is an exceptionally low level of visibility as to when companies may be in a position to commence paying dividends once more and also at what level they may reintroduce a payment. The Fund Manager has set out his expectations for dividends from the Company's investments within his report.

Consequently, the macro background for an Investment Trust with an objective of seeking income and income growth from a predominantly UK equity portfolio could hardly be more hostile or uncertain.

Shareholders should rightly ask "What is the Board's strategy in response to such a background"?

The answer is simple. The Board intends to use the benefits of the Investment Trust structure to ensure that the level of dividend to shareholders is at least maintained for the foreseeable future.

Revenue reserves following the payment of the fourth quarterly interim dividend will be £4.9 million, approximately 5.7p per ordinary share, equivalent to 109% of the total annual dividend of 5.21p per ordinary share paid in respect of the year to 31 March 2020. These reserves can and, if required, will be used to supplement revenue earnings in future periods. Indeed, following the cancellation of previously declared dividends by several companies held in the portfolio just before your Company's year end, £436,000 of revenue reserve will be used to pay the above dividend.

Your Directors consider that the Manager has placed the portfolio in a strong position and shareholders should be encouraged by the fact that the level of reduced or unpaid dividends for the portfolio to date is lower than that recorded by the FTSE All-Share Index - I will leave the Manager to provide more detail on this in his report.

It may well be the case in future that dividends from UK companies are fundamentally rebased to a lower level and such a situation would severely impair the ability to maintain current payment levels over the long term. However, your Board and Manager will make every effort to try and at least maintain the level of payment to shareholders. The Board is aware of the paucity of yield and income available from other asset classes. Interest rates have been reduced to all time low levels. Bond yields are likewise low. Other asset classes which are owned primarily for an income return have encountered significant difficulties in their ability to maintain dividends.

Shareholders in BMO UK High Income Trust have invested because they seek an above average yield and potential for capital growth. Your Board recognises that, and you can be assured of its determination to deliver to the best of its ability on the shareholders' requirements.

Review of year to 31 March 2020

The Net Asset Value ("NAV") total return for the year to 31 March 2020 was -21.4%, which compares with the return from the FTSE All-Share Index (the benchmark) of -18.5%. The absolute numbers are, of course, disappointing but all of the decline was recorded during the final five weeks of the year.

In addition to the sharp declines seen in equity markets late in the financial year the, now seemingly irrelevant events in respect of Brexit and the UK General Election were of significance with regard to relative performance. The portfolio was constructed with a bias towards companies exposed to the UK economy which were considered to be trading at attractive valuations - partly due to the uncertainty surrounding Brexit. Such companies generally underperformed in share price terms ahead of the General Election in December and the portfolio mirrored this performance. However, following the election and consequent greater certainty on Brexit the portfolio demonstrated strong relative outperformance and continued to do so until the stockmarket began to discount the implications of the COVID-19 pandemic in March 2020.

As the Manager has focussed the investment portfolio there is a very high level of commitment behind each investment demonstrated by the active weight of 86%. Consequently, the portfolio is unlikely to and indeed has not, performed in line with the benchmark index. This was amply demonstrated in the past year with periods of significant outperformance and underperformance relative to the benchmark being seen.

Revenue earnings per share for the financial year were 3.46p a decrease of 8.2% from the previous year. This decrease was attributable to the late cancellation of several dividends, as discussed above. Your Manager has continued to improve the dividend reliability of the portfolio and reduced the investment in companies with higher yields but (in normal times) potentially vulnerable dividends and invested the proceeds in companies with lower dividend yields but where there were opportunities for significantly faster dividend growth in the future.

Dividends and Capital Repayments

A fourth quarter interim dividend and a capital repayment of 1.34p per share was paid on 1 May 2020 to ordinary shareholders and B shareholders respectively, on the register on 3 April 2020. The total dividend/capital repayment for the year to 31 March 2020 will thus be 5.21p an increase of 3.4% on the equivalent distribution for the previous financial year. The total dividend/capital repayment represents a yield of 6.6% based on both the ordinary share and B share prices of 78.5p as at 27 May 2020.

Board Succession

This is a matter which was discussed in the last annual report and the Board is continuing to manage its succession while making every effort to ensure that both the tenure of individual Directors and the overall board structure complies with the best standards of current corporate governance.

Consequently, Iain McLaren retired as Chairman following the AGM in July 2019 and I was appointed to succeed him. James Williams will retire as a non-executive director at the forthcoming AGM after serving on the Board for 11 years. James has been the Senior Independent Director on the Board and I am pleased that Andrew Watkins has agreed to fulfill this role following James' retirement. I would like to thank James for his considerable contribution to the Board over the entire period of his appointment. His wisdom and experience will be missed.

Julia Le Blan (Chair of the Audit Committee) will have served as a Director for 10 years when we reach the AGM in 2021. It is the current intention that Julia will retire at that meeting. Following Julia's retirement, no Director will have served on the Board for a period longer than 9 years.

We were delighted to recently announce two new appointments to your Board. Helen Galbraith (nee Driver) and Stephen Mitchell were appointed as non-executive directors with effect from 6th May 2020. Both have considerable experience in the Investment world and will bring complementary skills to your board.

Helen commenced her career with Standard Life Investment Management and subsequently managed funds for Legal & General and was Head of Global Equities at Aviva Investors. She has considerable experience of managing Income funds. It is intended that Helen will become the chair of the Audit Committee when Julia retires.

Stephen recently retired as Head of Global Equity Strategy at Jupiter Asset Management and has, over his career, managed funds within a variety of asset classes, and has experience of managing Investment trusts at both JP Morgan Fleming and Caledonia Investment Trust.

I would like to welcome Helen and Stephen to the Board and look forward to working with them. I am sure both will make a significant contribution to the Board.

Full biographies of all the Directors are included in the Annual Report and Financial Statements.

Share Buy Backs

At the financial year end, the Company's ordinary share price and B share price stood at a discount to net asset value of 9.3% and 11.9% respectively. The average discount level at which the Company's Ordinary and B shares traded relative to net asset value in the year was 8.5% and 8.7% respectively.

During the year the Company bought back 405,491 Ordinary shares and 117,953 B shares, representing 0.5% and 0.4% of the Ordinary shares and B shares in issue at the start of the year. The shares were bought back in line with the Company's stated policy, which is to repurchase shares of either class, at the Director's discretion, when there are net sellers and the market price stands at a discount to net asset value of 5.0% or more. The price paid for the ordinary shares bought back represented a discount of approximately 13% to the prevailing net asset value at the time of purchase.

Annual General Meeting

The Annual General Meeting is currently scheduled to be held on 27th July 2020 at the offices of BMO Global Asset Management, Quartermile 4, 7a Nightingale Way, Edinburgh, EH3 9EG at 12 noon. In view of the current restrictions on travel and social distancing the meeting will not be held in the usual format. It will be restricted to the formal business of the meeting as set out in the Notice of the Annual General Meeting and as explained in more detail in the Report of the Directors in the Annual Report and Financial Statements and will follow the minimum legal requirements for an AGM. On this occasion the Fund Manager will not attend the meeting and his presentation will be pre-recorded and made available on the Company's website together with some frequently asked questions.

If some measure of the Government's current restrictions and social distancing measures remain in place in July, shareholders are strongly discouraged from attending the meeting and entry will be restricted and/or refused in accordance with the Articles, the law and/or Government guidance.

Arrangements will be made by the Company to ensure that the minimum number of shareholders required to form a quorum will attend the meeting in order that the meeting may proceed and the business concluded.

We would strongly encourage all shareholders to make use of the proxy form provided 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 meeting.

In view of the revised format this year, should shareholders have any questions or comments in advance of the AGM these can be raised with the Company Secretary (UKHITCoSec@bmogam.com). These will be relayed to the Board and we will respond in due course.

The Board will keep the situation under review and any changes to the meeting or the location will be notified through the Company's website and announcements to the London Stock Exchange.

If any change or postponement was to be made to the AGM, it is not currently expected that it would have a material impact on the operation of the Company. Although the Company puts forward its dividend policy for approval at each AGM (Resolution 10 in the Notice of the AGM), the Company pays four interim dividends all of which have been paid already.

Outlook

Financial markets face the most uncertain outlook, certainly since 1974. Central Banks and Governments throughout the Western World have responded to the COVID-19 pandemic and the necessary restrictions to defeat it by creating vast liquidity and attempting to mitigate the economic effects of the restrictions by providing funds and liquidity directly to companies. It remains to be seen how effective this support will prove to be and how quickly economic activity will resume.

Stockmarkets will anticipate the outcome and if it is a successful outcome, capital returns will precede the evidence of growth in the form of rising profits and dividends. It is to be expected that dividend payments from Companies will lag any recovery, possibly quite considerably.

As I said above these are difficult and uncertain times for a UK orientated Income Trust and we are in for a testing year.

Your Board has confidence in your Manager's ability to outperform the "dividend" background. Shareholders should be comforted that the Board and Manager are firmly focused on delivering the best possible income outcome in these uncertain times.

Can I conclude by wishing you and your families all the very best of health in the current trying circumstances.

John M Evans

Chairman

28 May 2020

Manager's Review

When it comes to the current environment, it is difficult to know where to start. I have listened to numerous commentators and economists over the last few weeks and the more I hear, the more questions I have. How long will we be in lockdown? How do governments start to get the system back to work? (the answers will vary by region). Will there be a second wave of infections as social distancing is relaxed? And, of critical importance, what happens when the government withdraws support for wages? Consumer behaviour and demand post-pandemic will ultimately decide the level of unemployment and help to answer the key question: will the economy grow or contract, and how will markets react?

While this may be a slight tangent, it is relevant to the above discussion. As you will know, we embarked on a new strategy three years ago. This was a combination of simplifying the message, concentrating and differentiating the portfolio, and importantly, upgrading the quality of our holdings.

At the outset of the pandemic the focus was on the ability of companies to survive while Government restrictions were in place. We believe our focus on the quality of our holdings has stood us in good stead and given us comfort on both the level of liquidity held to meet obligations, including debt repayments and investees' margins over bank covenants which indicate the likelihood of them defaulting on their debt. This was all about liquidity, or more simply, having enough cash to survive a collapse in revenue, and for how long? Without this shift we would have been in a tougher position to weather the liquidity squeeze that drove the initial sell-off.

Given the number of unknowns, we have focused our efforts on the knowns, i.e. the liquidity of each company in the portfolio. As a team, we have run due diligence on all of our holdings, speaking with most management teams to assess how they plan to deal with the current environment. Clearly, the dispersion of answers is extremely wide at this juncture and none have all the answers. Like us, they have stress-tested some very extreme scenarios, especially those that will be hit hardest, in some cases, for example Wizz Air, their extreme scenario was zero revenue for the rest of this year.

In summary, and caveated, we are as comfortable as we can be that our holdings have raised additional debt, drawn down on cash facilities and cancelled share buybacks and dividends to give their businesses the best chance of survival. While this is going to be a tough year for dividends, capital preservation and durability of the business into the medium-term are foremost in my thought process, as there will be some incredible opportunities for the stronger businesses when we emerge from this pandemic.

Performance

Over the financial year the NAV total return of the Ordinary shares and B shares fell -21.4% compared to the -18.5% decline in the benchmark. While this was disappointing, we were tracking significantly ahead in January and February before the onset of Coronavirus. The underperformance was therefore focused on the end of March, reasons for which I have outlined below. I would also like to add that through April we have caught up, and are now currently tracking ahead of the benchmark, highlighting how quickly this can change and the lack of benchmarking within the portfolio.

To understand why we have underperformed, I need to explain how the investment portfolio was constructed. As the Chair noted in his statement, it is always disappointing to underperform, especially so in weaker markets. When you build quality portfolios consisting of companies with strong balance sheets you expect that to provide more protection, which is why I feel this needs further explanation. Whilst some of the underperformance is short-term stock picking, as I have intentionally selected stocks that were out of favour (and therefore better value), my investment style also has not helped.

There were two key moves I made when the investment portfolio was repositioned. The first was to reduce our exposure to the mega-caps, where I felt business models were weak or I had no informational advantage. The current oil price shock is a good example, as energy companies are 'price takers' (have no control over the price of the main raw material: oil that defines their business) - in this case, my underweight to this sector was helpful. I also cut several of what might be deemed more stable and steady names like Unilever, Diageo (although I have recently bought this back at a better valuation) and AstraZeneca. The investment portfolio is underweight the oil & gas sector, and has no high street banks, both sectors that have performed disastrously. Conversely, being underweight larger capitalised names in totality has hurt relative performance.

The second move was to rebalance the portfolio down the market-cap spectrum, adding significantly to domestic UK mid-caps. I have always felt this part of the market is a more fertile hunting ground for quality businesses that can deliver solid compounding returns. This was a harder trade for me to make as I am a growth investor at heart. Valuations for quality growth businesses, were in my opinion, so extreme at the time given their 'bond-proxy' status, that I felt strategically this was the wrong call to make. I therefore sought quality value names that I felt were being incorrectly valued due to Brexit.

While I still believe this is the correct strategy, these quality value businesses, being more domestically focused, have hurt performance in the short term. Prior to the outbreak of coronavirus, we had in fact caught the index and were beginning to outperform. I have said this before but sometimes you need to take the contrarian stance and be sitting somewhere uncomfortable to make money. I therefore view this as a short-term setback, I have been here before, we just need to be patient. While I understand investor panic, personally I view periods like this as an opportunity to improve a portfolio and buy quality businesses at valuations that will in 2-3 years' time seem crazy.

The below relative position shows our portfolio construction in practice and the differentiated nature of the portfolio.

* Illustrates the difference between the Company's position in individual holdings as compared to their weighting in the FTSE All-Share Index at 31 March 2020.

Activity

Given the amount of turnover in the first 2 years, it is no surprise that we have considerably more comfort in our holdings and the shape of the portfolio. An investment portfolio is never 'complete'; there are always changes you want to make, but the portfolio does not have a tail of small positions where I lack conviction, every name counts. It is our plan to return towards 35 holdings or above in the foreseeable future, so as opportunities arise, we will add new names to the portfolio.

Having reduced HSBC considerably from 5% of the portfolio over the last few years, we concluded the exit, at the turn of the year. We used the proceeds to initiate a position in Richemont. Richemont is the owner of Cartier and Van Cleef & Arpels, two highly regarded jewellery brands, which form the cornerstone of the group's profitability. They also own several specialist watch brands including Panerai, Vacheron Constantin and IWC. While the jewellery business is very high quality, the group has been under pressure as they repositioned their watch portfolio - redesigning Cartier, reducing their reliance on the wholesale channel whilst at the same time, reducing the level of inventory in the system. This has been further challenged by the losses at their online platform Yoox Net-A-Porter, which is undergoing high levels of investment to transform its technology. We believe that the brands they own are first-class and that the issues they are currently facing are temporary, and should release value over the medium term.

We also purchased back Diageo with the valuation more palatable than at the point of sale. They will be impacted, especially by the closure of the "on-trade", bars and hotels where they sell a lot of their premium products. That will be partially mitigated by consumers switching to "off-trade" (home) drinking, but this will not make up for the current shortfall in earnings. I will use this opportunity to build up the weight. We also bought back the combined Just Eat Takeaway, having sold Just Eat when it was bid for by Takeaway. I have long been an advocate of these business models but Just Eat had short-term issues in the UK that needed to be dealt with, at an unknown cost to profitability. I know the Takeaway business well and the founder and CEO, Jitse Groen, is the right man to lead the combined group. There is a lot of value in Just Eat to be released, whether that be through the sale of iFood (minority Brazilian stake), or its Canadian or Australian assets. Focusing the business and turning around the UK market should release significant upside over the medium term. Sales have held very firm during the pandemic, aside from the first week of lockdown when they saw a slight dip. The competitive landscape should also change over the medium term as access to capital becomes tougher for Deliveroo and Uber Eats.

In terms of complete sells, these have been few and far between. We sold a small position in fund manager M&G after it was spun-out of Prudential. As we already held Jupiter, we did not see any need for another name in the same space. We also exited Sage after a very strong run, and a valuation that was full despite some competitive headwinds in their markets. Finally, Sophos was bid for by Thoma Bravo, a private equity business. This was an all-cash offer at $7.40, which was at a significant premium to the undisturbed price prior to the bid.

Dividends

My opening remarks around the new strategy and the quality upgrades that we have made are more pertinent when it comes to dividends. I would like to make it clear that recently I have had several discussions with management teams and, where necessary, advised them to cut the dividend. This is not because they cannot afford to pay, but in certain cases, namely housebuilders, there is no visibility on the outcome and therefore preservation of capital and the business will always take priority over the dividend. The ability of a company not just to survive, but to invest and to retain talent is fundamental to maintaining the best possible business into the future. There will be huge opportunities for strong, well-capitalised businesses to accelerate growth if they get their planning right and position themselves to capitalise after the current extreme event has subsided.

I have strong views on certain sectors that I either do not own or where we have considerably reduced our exposure. I have exited all our UK high street bank holdings; HSBC was the last position to be sold at the turn of the year. My preference is to own niche banking or financial businesses like Brewin Dolphin, Intermediate Capital and Close Brothers, that I feel have stronger business models and a competitive advantage. While the banks have become political footballs with the regulator telling them to cut their dividends (13% of the total UK Index income) we have seen several of our holdings in the financial sector continue to pay, so far, despite being impacted.

Oil & gas is another sector I have long been wary of, and while we still hold small and underweight positions in Shell and BP, I have made it clear to the Board, and shareholders, that these are not positions I want to hold in the medium term. The reason is I have zero informational advantage on the oil price, and these businesses barely cover their cost of capital in the good times. At $17 per barrel, this is an extreme event, but the 66% dividend cut by Shell tells you how poorly balanced these business models are when it comes to the cash flow. We have, therefore, mitigated the worst of the portfolio's exposure, which was another key element of the quality improvement that we embarked upon in 2017.

What the future may hold

We have undertaken stress-testing on our revenue account and discussed the current best-case and worst-case scenarios with the Board. The latter includes those companies we believe will not pay uncovered dividends, or where management changes may force this upon us.

This year should be the toughest, but we also have to be mindful that this stress could drag on into 2021. As the Chairman noted this is very difficult to forecast, but we believe our revenue expectation for the portfolio companies is currently tracking ahead of the market forecasts.

I would also note that out current gearing is also very marginal, 3.4% at the year-end. As you will know we have a fixed rate facility of £7.5m, which we have drawn down, however we held cash of £4m at the year-end. We also have a revolving credit facility of £7.5m, which is currently undrawn. We regularly discuss the appropriate level of gearing to deploy with the Board and currently feel with the total lack of visibility, now is not the appropriate time. When we deploy this it is likely to provide an additional boost to revenue which we have not included in our current forecasts.

Outlook

Forecasting the direction of economies and markets is not within our skillset, our focus lies elsewhere - a sensible stance given there is very little visibility on anything as we stand. If we consider for example just the practicalities of getting back to normal working life and how that knocks-on to the wider economy in terms of activity one can see how difficult it is to predict outcomes. There is a once in a decade opportunity to add to some of the more cyclical names we hold which have been impacted most, although for now I feel patience is required. The second quarter earnings are going to be very messy indeed as the full effect of the lockdown in the US and Europe comes to the fore. What recovery from that looks like is hard to gauge and rather than indulging in guess work, our near-term focus is on trying to protect capital, monitoring positions and identifying opportunities which we can harness once more clarity emerges.

Philip Webster

Fund Manager

BMO Investment Business Limited

28 May 2020

Statement of Comprehensive Income (audited)

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

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

No operations were acquired or discounted in the year.

Statement of Comprehensive Income (audited)

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

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

No operations were acquired or discounted in the year.

Statement of Financial Position (audited)

as at 31 March

Cash Flow Statement (audited)

for the year to 31 March

Statement of Changes in Equity (audited)

for the year to 31 March 2020

Statement of Changes in Equity (audited)

for the year to 31 March 2019

BMO UK High Income Trust PLC

Principal Risks and Uncertainties and Viability Statement

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

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, including Brexit are regularly reviewed by the Audit Committee and the Board. Most recently, consideration has been given to the potential 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. Whilst there are ongoing uncertainties relating to the UK's continuing trade negotiations with the EU following its departure on 31 January 2020, the Board does not consider that any related outcome will have a significant impact on the operations of the Company.

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

Financial Risk.

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

There is currently increased uncertainty in markets due to the effect of COVID-19 which has led to falls and volatility in the Company's NAV.

During the period the risks attached to Brexit appear to have increased as time is running out to reach agreement with the EU and the Government is preoccupied with COVID-19.

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 with the Manager and a Strategy meeting is held annually (at which investment performance is discussed in detail).

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 benchmark are considered by the Board at each meeting. A separate Board meeting is also held each year to consider strategic issues. The Investment Portfolio is diversified and comprises listed securities and its composition is reviewed regularly with the Board. BMO GAM's Investment Risk team provides oversight on investment risk management.

Market intelligence is maintained via the Company's Broker and the effectiveness of the marketing strategy is also reviewed at each meeting. The Manager also meets with major shareholders.

The Board regularly considers operating costs combined with underlying dividend income from portfolio companies and the consequent dividend paying capacity of the Company.

Regulatory. 

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

Mitigation: 

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

Operational. 

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

This risk includes failures or disruptions 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. The contract can be terminated with six months' notice. A business continuity plan is in place.

The Manager continues to benefit from the long-term financial strength and policies of its parent company, Bank of Montreal.

BMO GAM has outsourced trade processing, valuation and middle office tasks and systems to State Street Bank and Trust Company and supervision of such third party service providers, including SS&C who administer the BMO savings plans, has been maintained by BMO GAM and 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, the Manager has implemented working from home arrangements for its staff for all roles that can be performed remotely. BMO GAM has robust business contingency plans to ensure it can safeguard its employees, continue serving clients and keep operations running effectively and in compliance with its regulatory obligations. 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 in recent months, 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 securities and cash held in custody.

Viability assessment and statement

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

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

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

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

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

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

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

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

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

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

· 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.

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 potential impact of COVID-19. 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 0.96% of average net assets,

· future revenue and expenditure projections,

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

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

· the ability to undertake share buybacks if required,

· the effect of significant future falls in investment values and the ability to maintain dividends and capital repayments, particularly given the impact of the COVID-19 pandemic and its impact on the global economy and

· the uncertainties relating to the UK's continuing trade negotiations with the EU following its departure on 31 January 2020.

These matters were assessed over a five year period to May 2025, and the Board will continue to assess viability over five year rolling periods, taking account of severe but plausible scenarios. A rolling five year period represents the horizon over which the Directors believe they can form a reasonable expectation of the Company's prospects, balancing the Company's financial flexibility and scope with the current outlook for longer-term economic conditions affecting the Company and its shareholders.

Based on their assessment, and in the context of the Company's business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period to May 2025.

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 2020 of which this statement of results is an extract, that to the best of their knowledge:

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

· the Strategic Report 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

28 May 2020

Notes (audited)

1. The financial statements of the Company which are the responsibility of, and were approved by, the Board on 28 May 2020, 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, and to the extent that they have been adopted by the European Union.

The Company's subsidiary undertaking Investors Securities Company Limited has not been consolidated in the financial statements as it is exempt in accordance with Section 405(2) of the Companies Act 2006 on grounds of materiality. Investors Securities Company Limited has been classified at fair value through profit 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 loss for the year of £24,051,000 (year to 31 March 2019 profit: £4,222,000) and on 86,199,196 Ordinary shares (2019: 86,904,582) and 30,924,172 B shares (2019: 30,976,703), being the weighted average number of shares in issue of each share class during the year.

The Company's revenue earnings per share are based on the revenue profit for the year of £4,053,000 (year to 31 March 2019: £4,451,000) and on the weighted average number of shares in issue as above.

The Company's capital earnings per share are based on the capital loss for the year of £28,104,000 (year to 31 March 2019 loss: £229,000) and on the weighted average number of shares in issue as above.

3. The fourth interim dividend of 1.34p per Ordinary share, was paid on 1 May 2020 to Ordinary shareholders on the register at close of business on 3 April 2020, having an ex-dividend date of 2 April 2020. The fourth capital repayment of 1.34p per B share was paid on 1 May 2020 to B shareholders on the register on 3 April 2020.

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. £nil of the RCF was drawn down at 31 March 2020 (£nil at 31 March 2019). 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 405,491 Ordinary Shares (2019: 600,000 Ordinary shares) to hold in treasury at a cost of £379,000 (2019: £547,000) and 117,953 B shares (2019: nil B shares) to hold in treasury at a cost of £107,000 (2019: £nil). The Company did not buy back any shares for cancellation during the year (2019: nil).

At 31 March 2020 the Company held 16,144,491 Ordinary Shares (2019: 15,739,000 Ordinary shares) and 1,217,953 B shares (2019: 1,100,000 B shares) in treasury.

6. The Company's basic net asset value per share of 76.66p (2019: 102.39p) is based on the equity shareholders' funds of £89,521,000 (2019: £120,105,000) and on 116,781,403 equity shares, consisting of 85,922,653 Ordinary Shares and 30,858,750 B Shares (2019: 117,304,847 equity shares, consisting of 86,328,144 Ordinary Shares and 30,976,703 B Shares), being the number of shares in issue at the year end.

The Company's shares may also be traded as units, each unit consisting of three Ordinary Shares and one B Share. The basic net asset value per unit as at 31 March 2020 was therefore 306.64p (2019: 409.56p).

The Company's treasury net asset value per share, incorporating the 16,144,491 Ordinary Shares and 1,217,953 B Shares held in treasury at the year end (2019: 15,739,000 Ordinary Shares and 1,100,000 B Shares), was 76.16p (2019: 101.75p). The Company's treasury net asset value per unit at the end of the year was 304.64p (2019: 407.00p). The Company's current policy is to only re-sell shares held in treasury at a price representing a discount of not more than 5 per cent to net asset value at the time of sale, together with other conditions. Accordingly, for the purpose of the calculation, such treasury shares are valued at the higher of net asset value less 5 per cent and the mid market share price at each year end.

In future, if approved by shareholders at the AGM on 27 July 2020, the sale of treasury shares is to be at a price of not less than the net asset value per share.

7. Financial Instruments

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

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

The fair value of the financial assets and liabilities of the Company at 31 March 2020 is not materially different from their carrying value in the financial statements.

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

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

Credit risk

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

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

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

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

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

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

Market price risk

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

Liquidity risk

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

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

Interest rate risk

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

Floating rate

When the Company retains cash balances the majority of the cash is held in deposit accounts. The benchmark rate which determines the interest payments received on cash balances is the bank base rate, which was 0.1 per cent at 31 March 2020 (2019: 0.75 per cent).

Fixed rate

At 31 March 2020 and 31 March 2019, the Company's Investment Portfolio did not contain any fixed interest or floating rate interest assets. At 31 March 2020 and 31 March 2019, the Company had fixed interest liabilities.

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

Foreign currency risk

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

8. Going Concern

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

The Directors believe, in light of the controls and review processes and bearing in mind the nature of the Company's business and assets, 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 28 May 2020. 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 2020 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 2020 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 2020 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 27 July 2020.

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.

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

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.

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

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

†During the year to 31 March 2020 dividends/capital repayments totalling 5.16p (Ordinary shares/B shares) and 20.64p (units) went ex dividend.

†During the year to 31 March 2020 dividends/capital repayments totalling 5.16p (Ordinary shares/B shares) and 20.64p (units) went ex dividend.

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

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