To: RNS
From: CT UK High Income Trust PLC
Date: 31 May 2024
LEI: 213800B7D5D7RVZZPV45
Statement of Audited Results for the year ended 31 March 2024
Financial Highlights
· Net asset value total return(1) per share for the financial year was +11.8%, compared to the total return of the Benchmark(2) of +8.4%.
· Ordinary share price total return(1) per share for the financial year was +10.2%, compared to the total return of the Benchmark(2) of +8.4%.
· B share price total return(1) per share for the financial year was +5.5% compared to the total return of the Benchmark(2) of +8.4%.
· Distribution yield of 6.7% on Ordinary shares at 31 March 2024, compared to the yield on the FTSE All-Share Index of 3.8%. Total dividends increased by 2.0% to 5.62p per Ordinary share compared to the prior year.
· Distribution yield of 6.7% on B shares at 31 March 2024, compared to the yield on the FTSE All-Share Index of 3.8%. Total capital repayments increased by 2.0% to 5.62p per B share compared to the prior year.
(1) Yield and total return - See Alternative Performance Measures
(2) Benchmark - FTSE All-Share Index.
Chairman's Statement
"Eleventh consecutive year of dividend/capital repayment increases and at 31 March 2024 the Ordinary shares and B shares had yields of 6.7%"
I am pleased to present the annual results of CT UK High Income Trust PLC for the financial year ended 31 March 2024. Particularly pleased, in fact, as against a backdrop during the year of high interest rates and inflation in the UK and an escalation of global tensions, David Moss, the Company's Portfolio Manager has produced index-beating returns and generated an increase in dividends and capital repayments.
These have not been easy times. I hope that one day I shall not have to write such words and that investment managers, to whom shareholders have entrusted their savings, will find the investment universe easier to navigate. But for now, our daily lives seem to be peppered with news of yet another conflict that threatens world peace. I see that this time last year I believed that "the worst is behind us". Palpably wrong. Russia seems to have settled in for the long term in its desire to rebuild the old Soviet Union through destroying Ukraine and the Israel-Palestine war shows little sign of any permanent resolution in the short term. How does one manage money in such unpredictable times?
Well, I'm delighted to say that your Portfolio Manager has indeed maintained his focus and concentrated on the Company's priorities for its shareholders, namely, the growth in capital and dividends. Over the last few years, the Board has employed the Company's revenue reserve to maintain and grow distributions and this year is no exception. However, the Portfolio Manager is very well aware of - and is delivering upon - the Board's stated objective to rebuild revenue reserves and the principal reason for drawing on reserves again this year was the timing of dividend payments from investee companies that occurred after our year end.
Performance
In the financial year to 31 March 2024 your Company produced a Net Asset Value ('NAV') total return of +11.8% against a total return of +8.4% from the FTSE All-Share Index, the benchmark index. This is a very welcome and highly commendable outperformance of +3.4 percentage points from the Company's Portfolio Manager, David Moss. This was especially so during another challenging economic period which saw inflation peak at 11.1% in early 2023 with an attendant rise in the Bank of England base rate to 5.25% in a belated attempt to combat inflation's harmful effects on consumers and the UK economy.
As you will read in the detailed Manager's Review, the portfolio has been fine-tuned since the appointment of David Moss in July 2023 to take account of changing market conditions and sentiment, an approach applauded by your Board as being not only sensible and pragmatic but also in the best long-term interests of shareholders.
The Board also concurred with David that the Company should remain geared throughout the period. This proved painful as interest rates rose but, as he was confident that positions in quality companies could be acquired at reasonable prices, it proved tactically correct to do so. Altering gearing levels on a play-by-play basis seldom proves beneficial and whilst the Company has a flexible revolving credit facility, maintaining full exposure was a unanimous decision.
Share Price Performance and Discount to NAV
At the financial year end, the Company's Ordinary share and B share prices stood at discounts to the net asset value of 10.6% and 11.6% respectively. These discounts were wider than the Board would prefer but may have been affected, temporarily, by adjustments in the market as the Company's Units were cancelled at the very end of its financial year. The average discount levels at which the Company's Ordinary shares and B shares traded relative to net asset value in the financial year were 6.9% and 5.2% respectively and it remains the Board's preference for the discounts to be in single figures whilst maintaining the balance of supply and demand in the market for both share classes on a daily basis.
Consequently, the share price total return for the Ordinary shares and B shares was +10.2% and +5.5% respectively.
Dividends and Capital Repayments
As already mentioned, your Board recognises the importance of dividends to shareholders and has utilised the Company's revenue reserve to maintain and increase dividend payments to Ordinary shareholders in recent years. Total distributions to shareholders this year increased by 2% to 5.62p per share compared to the previous year. In the year to 31 March 2024 the revenue earnings per share increased by 10.8% but, due to the timing of some dividend receipts, as explained earlier, it has been necessary to draw £105,000 from the revenue reserve. This is a very short-term situation as those companies that were due to pay in March duly paid in April 2024. After payment of the fourth interim dividend on 3 May 2024, the revenue reserve is £2.3 million, representing 2.77p per Ordinary share.
Your Company has now increased its distributions to shareholders in each financial year since 2013 and has been duly recognised by the AIC as being part of the next generation of "Dividend Heroes" for increasing dividends to shareholders in ten or more consecutive years. The total dividend/capital repayment for the year to 31 March 2024 represented a yield of 6.7% based on the Ordinary share price and B share price of 84.5p and 83.5p respectively at 31 March 2024.
Gearing
As at the end of the year under review, the Company had a total borrowing facility of £15 million through an unsecured Revolving Credit Facility with The Royal Bank of Scotland International Limited. Your Board believes that an investment company should use gearing to enhance returns to shareholders whenever possible and encourages the Portfolio Manager to use his discretion accordingly. As at the year end, all of the £15 million facility had been drawn down.
Annual General Meeting (AGM)
The AGM will be held at 11 am on 26 July 2024 at Columbia Threadneedle Investments, Cannon Place, 78 Cannon Street, London EC4N 6AG. It is an opportunity for shareholders to engage with the Board and Manager and I hope you will be able to attend.
Outlook
It is a relief for all to see that, in spite of recent tensions, energy prices have come off their highs and domestic bills have correspondingly fallen. Combined with average wage increases now exceeding inflation, it feels that discretionary spending power is improving despite it seeming that the cost of everything is still going up. Personally, I would not be surprised if manufacturers attempted to rebuild profits through price rises but competition is a great leveller when vying for the consumer's money. So, that was a long-winded way of saying that my (relatively) optimistic outlook is back. With a General Election now called for 4 July 2024, whichever party forms the next Government is likely to oversee a slowly growing economy, inflation possibly at the Bank of England's target 2% rate accompanied by a very welcome (and overdue) fall in interest rates. Global tensions notwithstanding and assuming no major escalation or serious interruption to trade routes, it is possible to envision a much better environment for UK equities after a tough few years of treading water.
If my reading is correct, I firmly believe your Company is in the best possible shape to benefit accordingly. David Moss has constructed a balanced portfolio of companies with the potential to grow in capital terms and increase dividend payments, exactly the recipe required to produce positive returns for you, our shareholders. It is likely that the portfolio will remain geared during the Company's 2024-2025 financial year to capitalise accordingly, especially as interest rates decline and the cost of borrowing reduces. Making the most of the closed-ended structure of an investment company by gearing at appropriate times is wholly supported by your Board and should, I hope, reap rewards over the next 12 months.
As ever, thank you for being a shareholder in CT UK High Income Trust PLC. Your support is very much appreciated.
Andrew Watkins
Chairman
30 May 2024
Manager's Review
The last financial year has been different from recent ones in that Covid has not been a subject of discussion nor the key driver of share prices. We have, though, arguably been dealing with the consequences of the pandemic - namely the huge increases in Government borrowing and the money supply together with the breakdown of supply chains exacerbated by the conflict in Ukraine. The result has been that two directly related topics have been the only real driver of equity markets in the last twelve months - inflation and interest rates. When we started our financial year on 1 April 2023, we had already seen the fastest pace of UK base rate rises ever and we saw a further 100 basis points before the end of August. While sentiment on inflation has waxed and waned since then and the Bank of England has kept rates flat, there is clear evidence of inflation falling and we look forward to the Company's new financial year with a focus on when the first rate cut will be, rather than if it will happen.
What has perhaps been surprising is that while the UK economy has clearly slowed as a result of these interest rate increases, we have seen neither the collapse in consumer spending nor rise in unemployment predicted by some. While the UK experienced a very brief technical recession, the impact was minimal. The biggest liability for UK consumers is their mortgage and the nature of the majority of UK mortgages, where the rates are fixed typically for two to five years, has meant that together with the sheer number of UK homeowners that don't have a mortgage, many households have yet to be negatively impacted by higher rates. While inflation has clearly had an effect on household consumption habits, we have also seen rising nominal wages helping to offset the impact. With employment numbers remaining strong, inflation now falling and lower long-term rates feeding into lower mortgage rates, the outlook for the UK consumer is, in our opinion, improving. While we expect to see interest rates fall this year we do not see them falling to anywhere near the levels prevailing pre-and during the pandemic. Contrary to many, we see this as a positive and an environment that we consider 'normal' where money is not free and accordingly capital should be allocated more efficiently and one where savers are rewarded rather than punished.
After the turbulence in politics last year, we have had a relatively stable political backdrop in the last twelve months. We can expect a lot more political noise at least during the rest of this calendar year as we move through the general election and see the emergence of actual policy thereafter. Despite the economy holding up, a better outlook ahead and cuts to National Insurance contributions, it appears clear that this election will see a change in Government. Whilst the likelihood of a Labour administration often causes concern for investors and volatility in markets, for now at least the messaging from Labour and in particular the Shadow Chancellor has been benign. We will see the reality in due course but for now we see nothing to disturb our positive view of the year ahead.
Performance
While UK equities were volatile at times, falling 10% from the initial high point in April 2023 and then rising and falling over 6% twice more during the Company's financial year, better economic news, in particular on inflation, led the UK stock market, as measured by the FTSE All-Share Index, to rise fairly consistently from the October 2023 low to produce a total return of 8.4% over our financial year.
The net asset value ("NAV") total return of the Company was 11.8% over the financial year out-performing the benchmark index by 3.4 percentage points, representing a welcome return to out-performance. This represents an acceleration in performance from the first part of the financial year helped by the judicious use of gearing, the Company's portfolio was ahead of a rising market, with the biggest driver of performance being strong stock selection.
Pleasingly, we have had positive contributions from stocks we have held for some time, as well as stocks newly purchased this year. It has taken over a decade, but legal finance group Burford Capital finally received a positive opinion from the Judge in its case against the Argentinian Government for the forced nationalisation of YPF. There are still appeals to come but the market recognised the potential for value generation and the shares responded very strongly. Two other long-held investments were also amongst the leading positive contributors with Cairn Homes producing strong results with rising dividends and share buybacks as they benefit from being the largest housebuilder in an Irish market with a shortage
of housing. The biggest individual contributor was private markets investor Intermediate Capital Group where asset raising and investment returns have been robust. The demand from investors for access to private assets looks set to remain strong for years to come. Recent purchase SAP was amongst the top positive contributors as results were consistently good, the company increased guidance and was seen as a beneficiary of Artificial Intelligence.
Portfolio Changes
There has been an increase in turnover in the financial year as we looked to position the portfolio for what we felt were the opportunities ahead. This focused overwhelmingly on increasing the level of sustainable income generated by the portfolio and investing in companies where we could expect this to grow into the future. We approached this in two ways; we sold out of companies where dividends were zero or very low and where there was little prospect of any meaningful income soon and re-invested the proceeds in companies that have high current dividend yields and/or have the ability to grow distributions to shareholders. The latter is, we believe, the most important element as our strategy is to provide shareholders with a high and growing level of income. In terms of the companies that we sold, this included THG, ASOS, Wizz Air and Delivery Hero, all companies that we felt would struggle to fulfil expectations and where we saw no prospect of dividends on any sensible time horizon. We also sold a number of stocks with very low dividend yields and limited growth prospects including Experian, Deutsche Boerse, ASML and Hiscox.
We have made new investments in several areas but activity within the financials sector stands out. As stated above, we believe we are now in an era in which money is no longer free, i.e. interest rates will be positive even if lower than now. This is a significant change for banks in particular which have struggled to generate acceptable returns for some time. After many years of limited demand for credit and strict regulation, UK banks are very well capitalised, highly liquid and, having been ignored by investors for years, are now very attractively valued. In this new era, they are able to generate low-mid teens returns on equity and can deliver significant returns to shareholders including very attractive and growing dividends and we have, therefore, bought a position in NatWest Group. All the previous points apply to NatWest but in addition, at the time of purchase, the resolution of well-publicised internal issues and the change of CEO gave us even greater comfort.
We also added to our position in specialist buy-to-let lender OSB Group and bought UK asset manager and insurance company M&G.
Two of our purchases this year have been the largest stocks in the UK market - AstraZeneca and Shell. While we believe we can add a lot of value at the smaller end of the market we will not be dogmatic about what makes a good business whether that be size or type. AstraZeneca under CEO Pascal Soriot's tenure has proven to be one of the UK's most dynamic and high growth companies and one of the world's foremost pharmaceutical companies. Shell in common with most of its peers, has had a radical transformation in its approach to capital allocation. The oil companies have experienced high oil prices many times in the past but this boon normally results in big increases in capital expenditure on increasingly marginal projects and ultimately weaker returns for shareholders. In this cycle, Shell has been very disciplined on investment and the result has been high and growing returns to shareholders.
Outlook
What is most important for us is the quality of companies we invest in and the price we pay, not any particular economic view. That said, few of our investee companies operate in isolation and we are positive for the year ahead as the combination of an improving economic outlook, falling inflation and lower interest rates should be a very positive backdrop for equities. We can look at other equity markets and question whether this is priced in, but we are firmly of the view that this is not the case in the UK and especially in the more domestically exposed areas of the market. We and others have written extensively about the low valuation of UK equities but for our Company this provides fantastic opportunities. We can invest in companies that have the levels of dividends we need to meet our ambitions for our shareholders but the reason for these high dividends is not because they are weak or low returning businesses, but because they are in an out-of-favour market - the UK - and often in out-of-favour sectors. The result is that not only do these companies pay high dividends now, but we strongly believe they can grow these dividends into the future. Dividends grew 7.7% last year in the UK and we would expect more growth this coming year, together with a continuation of share buybacks if low valuations persist.
David Moss
Portfolio Manager
Columbia Threadneedle Investment Business Limited
30 May 2024
Statement of Comprehensive Income
| | | Year to31 March 2024 | ||
| | Note | Revenue | Capital | Total |
| |
| £'000 | £'000 | £'000 |
| |
|
|
|
|
| Capital gains on investments |
|
|
|
|
| Gains on investments held at fair value through profit or loss | |
- |
7,674 |
7,674 |
| Exchange gains |
| 1 | 9 | 10 |
| Revenue | | | | |
| Income | | 5,603 | - | 5,603 |
|
|
|
|
|
|
| Total income | | 5,604 | 7,683 | 13,287 |
|
| | | | |
| Expenditure | | | | |
| Investment management fee | | (186) | (435) | (621) |
| Other expenses |
| (518) | - | (518) |
|
|
|
|
|
|
Total expenditure | | (704) | (435) | (1,139) |
| | |
|
|
|
| Profit before finance costs and tax | | 4,900 | 7,248 | 12,148 |
|
|
|
|
|
|
| Finance costs | | | | |
| Interest on bank loans | | (269) | (627) | (896) |
|
|
|
|
|
|
| Total finance costs | | (269) | (627) | (896) |
| | |
|
|
|
| Profit before tax | | 4,631 | 6,621 | 11,252 |
| Taxation |
| (30) | - | (30) |
| |
|
|
|
|
| Profit and total comprehensive income for the year |
|
4,601 |
6,621 |
11,222 |
|
| |
|
|
|
| Earnings per share | 2 | 4.01p | 5.77p | 9.78p |
The total column of this statement represents the Company's Income Statement and Statement of Comprehensive Income, prepared in accordance with UK-adopted International Accounting Standards.
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
| | | Year to31 March 2023 | ||
| | Note | Revenue | Capital | Total |
| |
| £'000 | £'000 | £'000 |
| |
|
|
|
|
| Capital gains/(losses) on investments |
|
|
|
|
| Losses on investments held at fair value through profit or loss | |
- |
(4,177) |
(4,177) |
| Exchange gains/(losses) |
| 3 | (16) | (13) |
| Revenue | | | | |
| Income |
| 5,007 | - | 5,007 |
|
|
|
|
|
|
| Total income | | 5,010 | (4,193) | 817 |
|
| | | | |
| Expenditure | | | | |
| Investment management fee | | (183) | (427) | (610) |
| Other expenses |
| (521) | - | (521) |
|
|
|
|
|
|
Total expenditure | | (704) | (427) | (1,131) |
| | |
|
|
|
| Profit/(loss) before finance costs and tax | | 4,306 | (4,620) | (314) |
|
|
|
|
|
|
| Finance costs | | | | |
| Interest on bank loans | | (67) | (155) | (222) |
|
|
|
|
|
|
| Total finance costs | | (67) | (155) | (222) |
| | |
|
|
|
| Profit/(loss) before tax | | 4,239 | (4,775) | (536) |
| Taxation |
| (47) | - | (47) |
| |
|
|
|
|
| Profit/(loss) and total comprehensive income/(expense) for the year |
|
4,192 |
(4,775) |
(583) |
|
| |
|
|
|
| Earnings per share | 2 | 3.62p | (4.12)p | (0.50)p |
The total column of this statement represents the Company's Income Statement and Statement of Comprehensive Income, prepared in accordance with UK-adopted International Accounting Standards.
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
as at 31 March
| |
| 31 March 2024 | 31 March 2023 | |||
| | | Note | £'000 |
| £'000 |
|
| Non-current assets |
| | | | |
|
| Investments held at fair value through profit or loss |
| |
121,267 | |
113,018 |
|
| |
| | | | |
|
| Current assets |
| | | | |
|
| Receivables |
| | 1,203 | | 1,394 |
|
| Cash and cash equivalents |
| | 1,086 | | 2,288 |
|
| |
| | 2,289 | | 3,682 |
|
| Total assets |
|
| 123,556 |
| 116,700 |
|
| |
| | | | |
|
| Current liabilities |
| | | | |
|
| Payables |
| | (790) | | (529) |
|
| Bank loan |
| | (15,000) | | (12,000) |
|
| |
| | (15,790) | | (12,529) |
|
| Total liabilities |
|
| (15,790) |
| (12,529) |
|
| Net assets |
|
| 107,766 |
| 104,171 |
|
|
Equity attributable to equity shareholders |
| | | | |
|
| Share capital | | | 134 | | 134 |
|
| Share premium | | | 153 | | 153 |
|
| Capital redemption reserve | | | 5 | | 5 |
|
| Buy-back reserve | | | 79,022 | | 80,315 |
|
| Special capital reserve | | | 8,320 | | 10,012 |
|
| Capital reserves | | | 16,444 | | 9,823 |
|
| Revenue reserve | | | 3,688 | | 3,729 |
|
| Equity shareholders' funds |
|
| 107,766 |
| 104,171 |
|
| | | | | | |
|
| | | | | | |
|
| Net asset value per Ordinary share | | 6 | 94.51p | | 89.97p |
|
| Net asset value per B share | | 6 | 94.51p | | 89.97p |
|
Cash Flow Statement
for the year to 31 March
| |
|
|
| | Year to 31 March 2024 | Year to 31 March 2023 |
| | £'000 | £'000 |
| | | |
| Cash flows from operating activities | | |
| Profit/ (loss) before taxation | 11,252 | (536) |
| Adjustments for: | | |
| (Gains)/ losses on investments held at fair value through profit or loss |
(7,674) |
4,177 |
| Exchange (gains)/ losses | (10) | 13 |
| Interest income | (84) | (70) |
| Interest received | 84 | 70 |
| Dividend income | (5,519) | (4,937) |
| Dividend income received | 5,727 | 4,698 |
| Decrease/(increase) in receivables | 1 | (64) |
| Increase/(decrease) in payables | 45 | (15) |
| Finance costs | 896 | 222 |
| Overseas tax suffered | (69) | (76) |
| Cash flows from operating activities | 4,649 | 3,482 |
| Cash flows from investing activities Purchases of investments Sales of investments |
(62,065) 61,699 |
(45,856) 42,153 |
| Cash flows from investing activities | (366) | (3,703) |
| Cash flows before financing activities | 4,283 | (221) |
| Cash flows from financing activities | | |
| Dividends paid on Ordinary shares | (4,642) | (4,690) |
| Capital returns paid on B shares | (1,692) | (1,692) |
| Shares purchased for treasury | (1,293) | (79) |
| Interest on bank loans | (868) | (203) |
| Drawdown of bank loans | 3,000 | 4,500 |
| Cash flows from financing activities | (5,495) | (2,164) |
|
| | |
| Net decrease in cash and cash equivalents | (1,212) | (2,385) |
| Cash and cash equivalents at the beginning of the year | 2,288 | 4,686 |
| Effect of movement in foreign exchange | 10 | (13) |
| Cash and cash equivalents at the end of the year | 1,086 | 2,288 |
| Represented by: | | |
| Cash at bank | 176 | 199 |
| Short term deposits | 910 | 2,089 |
|
| 1,086 | 2,288 |
Statement of Changes in Equity
for the year to 31 March 2024
| |
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 2023 | 134 | 153 | 5 | 80,315 | 10,012 | 7,965 | 1,858 | 3,729 | 104,171 |
| Movement during the year ended 31 March 2024 |
|
|
|
|
|
|
|
|
|
| (Loss)/profit for the year | - | - | - | - | - | (6,716) | 13,337 | 4,601 | 11,222 |
| Total comprehensive income/ (expense) for the year |
- |
- |
- |
- |
- |
(6,716) |
13,337 |
4,601 |
11,222 |
| Transactions with owners of the Company recognised directly in equity |
|
|
|
|
|
|
|
|
|
| Shares bought back for treasury | - | - | - | (1,293) | - | - | - | - | (1,293) |
| Dividends paid on Ordinary shares | - | - | - | - | - | - | - | (4,642) | (4,642) |
| Capital returns paid on B shares | - | - | - | - | (1,692) | - | - | - | (1,692) |
| Balance as at 31 March 2024 | 134 | 153 | 5 | 79,022 | 8,320 | 1,249 | 15,195 | 3,688 | 107,766 |
Statement of Changes in Equity
for the year to 31 March 2023
| |
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 2022 | 134 | 153 | 5 | 80,394 | 11,704 | 8,001 | 6,597 | 4,227 | 111,215 |
| Movement during the year ended 31 March 2023 |
|
|
|
|
|
|
|
|
|
| (Loss)/profit for the year | - | - | - | - | - | (36) | (4,739) | 4,192 | (583) |
| Total comprehensive income/ (expense) for the year |
- |
- |
- |
- |
- |
(36) |
(4,739) |
4,192 |
(583) |
| Transactions with owners of the Company recognised directly in equity |
|
|
|
|
|
|
|
|
|
| Shares bought back for treasury | - | - | - | (79) | - | - | - | - | (79) |
| Dividends paid on Ordinary shares | - | - | - | - | - | - | - | (4,690) | (4,690) |
| Capital returns paid on B shares | - | - | - | - | (1,692) | - | - | - | (1,692) |
| Balance as at 31 March 2023 | 134 | 153 | 5 | 80,315 | 10,012 | 7,965 | 1,858 | 3,729 | 104,171 |
CT UK High Income Trust PLC
Principal Risks and Uncertainties and Viability Statement
As an investment company investing primarily in listed securities, most of the Company's principal risks and uncertainties that could threaten the achievement of its objective, strategy, future performance, liquidity and solvency are market-related.
A summary of the Company's risk management and internal controls arrangements is included within the Report of the Audit Committee in the Annual Report and Financial Statements. 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. The Board also considers emerging risks which might affect the Company and related updates from the Manager on such risks are also considered. During the year risks included the outlook for inflation and ongoing macroeconomic and geopolitical concerns. Any emerging risks that are identified and that are considered to be of significance would be included on the Company's risk register with any mitigations. These significant risks, emerging risks and other risks are regularly reviewed by the Audit Committee and the Board. They have also regularly reviewed the effectiveness of the Company's risk management and internal control systems for the period.
In November 2021, the Company's Manager, which was part of BMO GAM (EMEA) was acquired by Ameriprise and the integration of its business with Columbia Threadneedle Investments then progressed. There has been little change for your Company, however, an acquisition such as this introduces some uncertainty, until the integration of systems is fully implemented. A critical milestone was the move to a new order management system, Aladdin, which is widely regarded as the market leading system. This change was successfully completed in October 2023 and this risk is now viewed as reduced.
The principal risks and uncertainties faced by the Company, and the Board's mitigation approach, are described below.
Investment performance risk
Inappropriate strategy, asset allocation, stock selection, (in the context of the market, economic or geopolitical backdrop) and the use of gearing could all lead to poor returns for shareholders including impacting the capacity to pay dividends.
No change in overall risk but given macroeconomic and geopolitical concerns, this risk remains heightened.
Mitigation:
The Company's objective and investment policy and performance against peers and the benchmark are considered by the Board at each meeting and strategic issues are considered regularly.
The Board regularly considers the composition and diversification of the Investment Portfolio (which comprises listed securities) and considers individual stock performance together with purchases and sales of investments. Investments and markets are discussed in detail with the Manager on a regular basis.
Engagement on environmental, social and governance matters is undertaken by the Manager and its approach is explained in the Annual Report and Financial Statements.
As a closed-end investment company, it is not constrained by asset sales to meet redemptions so can remain invested through volatile market conditions and is well suited to investors seeking longer term returns.
The Board regularly considers ongoing charges combined with underlying dividend income from portfolio companies and the consequent dividend paying capacity of the Company.
Legal and regulatory risk
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.
No change in overall risk.
Mitigation:
The Board liaises with advisors to ensure compliance with laws or regulations.
The Manager and its Operational Risk Management team 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 the Manager's Head of Operational Risk Management and requires any significant issues directly relevant to the Company to be reported immediately.
Third party service delivery and Cyber risks
Failure of the Manager as the Company's main service provider or disruption to its business, or that of an outsourced or third party service provider, could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets leading to a potential breach of the Company's investment mandate or loss of shareholders' confidence.
External cyber attacks could cause such failure or could lead to the loss or sabotage of data.
No change in overall risk but due to the integration with Columbia Threadneedle's systems, this risk was heightened.
Mitigation:
The Board meets regularly with the management of the Manager and its Operational Risk Management team to review internal control and risk reports which includes oversight of its own third party service providers. The Manager's appointment is reviewed annually and the contract can be terminated with six months' notice. The Manager 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.
The Manager has outsourced certain functions to State Street Bank and Trust Company ('State Street') and supervision of such third party service providers, including the administrator of the Manager's savings plans, has been maintained by the Manager. This includes the review of IT security and heightened cyber threats.
The Manager also closely monitors the performance of its technology platform to ensure it is functioning within acceptable service levels.
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 primarily in liquid listed securities and that the level of borrowing is restricted.
· The Company is a listed 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 period, the Company's business model and strategy is not time limited. The current performance measurement period for this purpose will be the three years to 31 March 2025.
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 facility, which remains available until September 2025, is also subject to a formal agreement, 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 alternative working arrangements.
· That alternative service providers could be engaged at relatively short notice if necessary.
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 and solvency. This included the impact of market volatility and 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 (at 31 March 2024) total 1.08% of average net assets.
· Future revenue and expenditure projections.
· The Company's ability to meet liquidity requirements given its investment portfolio consists mainly of readily realisable listed equity securities which can be realised if required.
· The ability to undertake share buy-backs if required.
· Whether the Company's objective and investment policy continue to be relevant to investors.
· The effect of significant future falls in investment values and the ability to maintain dividends and capital repayments, particularly given the uncertainty in markets and macroeconomic and geopolitical concerns.
These matters were assessed over a three year period to May 2027, and the Board will continue to assess viability over three year rolling periods.
As part of this assessment the Board considered stress tests and scenarios which considered the impact of severe stock market volatility on shareholders' funds and declines in income over a three 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 three 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 three year period to May 2027.
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 2024 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 UK-adopted International Accounting 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
Andrew Watkins
Chairman
30 May 2024
Notes
1. The financial statements of the Company which are the responsibility of, and were approved by, the Board on 30 May 2024, have been prepared on a going concern basis and in accordance with the Companies Act 2006 and UK-adopted International Accounting Standards.
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 UK-adopted International Accounting Standards, 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 £11,222,000 (year to 31 March 2023: loss of £(583,000)) and on 84,025,522 Ordinary shares (2023: 85,118,954) and 30,708,750 B shares (2023: 30,708,750), 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 £4,601,000 (year to 31 March 2023: £4,192,000) 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 £6,621,000 (year to 31 March 2023: loss £(4,775,000)) 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 2024 of 1.66p per Ordinary share was paid on 3 May 2024 to Ordinary shareholders on the register on 5 April 2024. A fourth capital repayment in respect of the year ended 31 March 2024 of 1.66p per B share was paid on 3 May 2024 to B shareholders on the register on 5 April 2024.
4. The Company has an unsecured revolving credit facility ("RCF") with The Royal Bank of Scotland International Limited for £15 million which is available until 28 September 2025. At 31 March 2024, £15 million was drawn down (31 March 2023: £12 million).
The loan agreement contains certain financial covenants with which the Company must comply. These include a financial covenant with respect to the ratio of the Adjusted Portfolio Value (as defined in the loan agreement) to the level of debt and also that the Adjusted Portfolio Value does not fall below £50 million. The Company complied with the required financial covenants throughout the period since drawdown.
5. During the year the Company bought back 1,750,000 Ordinary shares (2023: 100,000 Ordinary shares) to hold in treasury at a cost of £1,293,000 (2023: £79,000). During the year the Company bought back nil B shares (2023: nil B shares).
At 31 March 2024 the Company held 18,744,491 Ordinary shares (2023: 16,994,491 Ordinary shares) and 1,367,953 B shares (2023: 1,367,953 B shares) in treasury.
6. The Company's basic net asset value per share of 94.51p (2023: 89.97p) is based on the equity shareholders' funds of £107,766,000 (2023: £104,171,000) and on 114,031,403 equity shares, consisting of 83,322,653 Ordinary shares and 30,708,750 B shares (2023: 115,781,403 equity shares, consisting of 85,072,653 Ordinary shares and 30,708,750 B shares), being the number of shares in issue at the year end.
The Company's treasury net asset value per share, incorporating the 18,744,491 Ordinary shares and 1,367,953 B shares held in treasury at the year end (2023: 16,994,491 Ordinary shares and 1,367,953 B shares), was 94.51p (2023: 89.97p). 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.
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 2024 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 investments 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, geopolitical backdrop 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 and Financial Statements.
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 facility 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 5.25 per cent at 31 March 2024 (2023: 4.25 per cent).
When the Company draws down amounts under its revolving credit facility, interest is payable based on SONIA (which can vary on a daily basis) plus a margin.
Fixed rate
At 31 March 2024 and 31 March 2023, the Company's investment portfolio did not contain any fixed interest or floating rate interest assets. At 31 March 2024 the Company had no fixed interest liabilities.
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 investment 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 an agreement relating to its borrowing facility with which it has complied during the year. Cash is only held with banks approved and regularly reviewed by the Manager.
In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. After making enquiries, and bearing in mind the nature of the Company's business and assets and revenue and expenditure projections, the Directors consider 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. Under the FCA Listing Rules, the Manager is also defined as a related party. However, 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 for accounting purposes.
There are no transactions with the Board other than aggregated remuneration for services as Directors as disclosed in the Directors' Remuneration Report within the Annual Report and 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 Columbia Threadneedle Investment Business Limited are detailed in the notes to the financial statements.
10. This statement was approved by the Board on 30 May 2024. 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 2024 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 during June 2024 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 ctukhighincome.co.uk
The Annual General Meeting of CT UK High Income Trust PLC will be held at 11 am on 26 July 2024 at Columbia Threadneedle Investments, Cannon Place, 78 Cannon Street, London EC4N 6AG.
The audited financial statements for the year to 31 March 2024 will be lodged with the Registrar of Companies following the Annual General Meeting.
Alternative Performance Measures ("APMs")
The Company uses the following 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 2024 | |
| | | Ordinary shares | B shares |
| Net asset value per share | (a) | 94.51p | 94.51p |
| Share price | (b) | 84.50p | 83.50p |
| Discount (c=(b-a)/(a)) | (c) | -10.6% | -11.6% |
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 2024 £'000 |
| Total expenditure | | 1,139 |
| Less revolving credit facility commitment fee | | (7) |
| Less non-recurring expenses | | (39) |
| Total | (a) | 1,093 |
| Average daily net assets | (b) | 100,939 |
| Ongoing charges (c = a/b) | (c) | 1.08% |
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 2024 £'000 |
| Investments held at fair value through profit or loss | (a) | 121,267 |
| Net assets | (b) | 107,766 |
| Gearing (c = (a/b)-1)% | (c) | 12.5% |
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 2024 |
| | Ordinary shares/ B shares |
| NAV per share at start of financial year | 89.97p |
| NAV per share at end of financial year | 94.51p |
| Change in the year | +5.0% |
| Impact of dividend/capital repayment reinvestment† | +6.8% |
| NAV total return for the year | +11.8% |
†During the year to 31 March 2024 dividends/capital repayments totalling 5.51p (Ordinary shares/B shares) went ex-dividend.
| | 31 March 2024 | |
| | Ordinary shares | B shares |
| Share price per share at start of financial year | 82.0p | 84.5p |
| Share price per share at end of financial year | 84.5p | 83.5p |
| Change in the year | +3.0% | -1.2% |
| Impact of dividend/capital repayment reinvestment† | +7.2% | +6.7% |
| Share price total return for the year | +10.2% | +5.5% |
†During the year to 31 March 2024 dividends/capital repayments totalling 5.51p (Ordinary shares/B shares) went ex-dividend.
Yield - The total annual dividend/capital repayment expressed as a percentage of the year end share price.
| | | 31 March 2024 | |
| | | Ordinary shares | B shares |
| Annual dividend/capital repayment | (a) | 5.62p | 5.62p |
| Share price | (b) | 84.50p | 83.50p |
| Yield = (c=a/b) | (c) | 6.7% | 6.7% |
For further information, please contact:
David Moss
Portfolio Manager to CT UK High Income Trust PLC Tel: 0131 573 8300
Ian Ridge
For Columbia Threadneedle Investment Business Limited
Company Secretary to CT UK High Income Trust PLC Tel: 0131 573 8300
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