BMO Capital and Income Investment Trust : Annual Financial Report

BMO CAPITAL AND INCOME INVESTMENT TRUST PLC

Audited Statement of Results for the year ended 30 September 2019

LEI: 21380052ETTRKV2A6Y19

02 December 2019

BMO Capital and Income Investment Trust PLC ('BCI' / 'Company') today announces its results for the year ended 30 September 2019.

· BCI's Net Asset Value ('NAV') total return of 5.3% marks another year of outperformance against its FTSE All-Share Index (our 'Benchmark'), which returned 2.7%.

· On a three year view, the NAV total return was 29.9% compared to the Benchmark's 21.7% and over five years it was 56.9% against the Benchmark's 38.9%.

· Under Fund Manager, Julian Cane, BCI has beaten its Benchmark over 1,3,5,10 and 20 years.

· BCI is proposing to pay a fourth interim dividend of 3.75 pence per share to bring the fully covered total for the year to 11.4 pence per share, an increase of 4.1%.

· The 4.1% increase is ahead of CPI inflation of 1.8% and will be the 26th consecutive year of increased payments.

· The Ongoing Charges figure was 0.58%, the same as last year. This has fallen from 0.88% ten years ago to its current level, a reduction of more than a third over the period.

The Chairman, Steven Bates, said:

'This marks another year of outperformance and crowns an excellent run chalked up in recent years. We are delighted to have beaten our Benchmark over 1,3,5,10 and 20 years.'

Chairman's Statement

Writing this statement a year ago, markets were suffering a bout of the jitters that the global economy was too strong and that interest rates were on an upward trajectory. The old aphorism that markets always know what is what turned out to be wrong though. A year on, and the worry has flipped with concern now that the global economy is too weak, and this has triggered a new round of central bank easing of monetary policies: interest rates are falling in all major economies, and an unprecedented percentage of government debt trades at negative interest rates. This is very far from normal.

Because of the monetary conditions, the prop that has supported equities since the Great Financial Crisis is still intact. One of the criticisms of policymakers has been that providing bucketloads of liquidity (financial jargon for low interest rates) has not led to a stronger economy or inflation, as theory suggested, but instead to higher asset prices in both

bond and equity markets. This is where the inflation in our system shows up. As an equity investor in this Company, of course, you have been on the right side of this outcome.

At the start of the year, investors worried about the whole panoply of geopolitical uncertainty and about the longevity of the economic cycle. A year on, geopolitical uncertainty has not improved and the cycle is a year older, yet neither has been enough to derail the equity market train.

As I write, we are heading towards a general election and it is difficult to say much about the UK as political circumstances are so volatile. Basing an investment strategy on any particular outcome of our constitutional crisis is a counsel of madness. There is an investment approach which assumes that everything will 'muddle through', and that is still the most likely outcome: listed companies held in the portfolio are well managed, and not only dependent on the UK economy, but a more extreme result cannot be ruled out.

Performance

This year, the Net Asset Value ('NAV') per share on a total return basis was 5.3% while the share price total return was a little lower at 3.1% reflecting a move to a small discount. The FTSE All-Share Index, our 'Benchmark', rose by 2.7% on the same basis. These returns mark another year of outperformance and crown an excellent run chalked up in recent years. I would point out that in the first half of our fiscal year, the NAV total return fell by 0.8%, so the second half has shown a good recovery. On a three year view, it was 29.9% compared to the Benchmark's 21.7% and over five years it was 56.9% against the Benchmark's 38.9%.

These are excellent numbers and one in the eye for believers in the passive approach to equity investing. These types usually argue that these periods aren't long enough to prove anything. We are delighted to have beaten our Benchmark over 1,3,5,10 and 20 years.

Your fund manager, Julian Cane, has been responsible for the management of the portfolio throughout this time. He may not be a self-publicist or appear in the gossip columns but results like these do not come out of thin air, and he deserves a lot of credit for having achieved them.

Liquidity

As a result of problems at some other investment management groups, investors and regulators have become concerned about a lack of liquidity in their investments. Our portfolio only holds listed equities and we are confident these are sufficiently liquid for any foreseeable situation.

Gearing and Attribution

During the year, our gearing averaged 3.6%. Initially, as markets fell, this had a cost to the return, but was a modest net contributor to return for the year as a whole. We have a loan facility of £30 million available, of which £20 million remained undrawn at the year end.

Income Account

The revenue return for the year was 13.12 pence per share, up by 12.1% from last year. The revenue earned by the Company is obviously dependent on the mix of stocks in the portfolio and the quantum of special dividends which are revenue items - these dividends can sometimes be treated as returns of capital which do not appear in the income account. Over recent years, without compromising income, Julian has rebalanced the portfolio away from the traditional very highest income payers in the UK market, many of which have dividends which are static and could be under threat, towards lower yielding, faster growing holdings, where dividend growth is expected to be robust.

It is pleasing to be able to report, therefore, that we have maintained our record of increasing our dividend by more than the rate of inflation in the UK. So far this year, we have paid three interim dividends of 2.55 pence and are proposing to pay a fourth of 3.75 pence per share to bring the total for the year to 11.40 pence per share. This represents an increase of 4.1% over last year's payments. Inflation, as measured by the CPI, rose by 1.8% over the comparable period. I would note that we have revenue reserves available to release for dividend payments should that prove necessary, but the revenue account has been strong enough that we have not needed to do so. We expect this condition to persist.

Over the past five years, our dividend has risen by 3.0% annually, compared to an inflation rate of 1.6%.

This is the 26th consecutive year of increased dividend payments, which cements the Company's status as a 'Dividend Hero' as defined by our industry body, the Association of Investment Companies ('AIC').

This year, the cost of running the Company as measured by the Ongoing Charge calculation was 0.58%, the same as last year. For context, this has fallen from 0.88% ten years ago to its current level, a decline of more than a third over the period. This reflects the fact that fixed costs are spread over a much larger asset base, but the Board of Directors (the 'Board') is also conscious of the variable costs of running the Company, and does its best to keep these under control. Overall, the Board believes that these costs are competitive with alternative actively managed products, but higher than most index trackers. I cannot resist repeating, though, that you have done considerably better with us than you would have in a passive product and that the costs represent excellent value as a result. The 'N' for 'net' in NAV is important in underlining that the returns quoted earlier are after all these costs have been deducted.

Premium/Discount

The shares traded at an average premium during the year of 0.2%. The range was quite wide, from a premium of 5.5% to a discount of 4.2%. At the 30 September, the shares closed at a discount of 1.2%. The trading conditions were in line with the historical experience, and the periods at which a premium held were longer than those when a discount was

evident. This combination of circumstances allowed us to issue 1,725,000 shares during the year, at an average premium of 1.9%. This amounted to an additional capital contribution of £5.3 million and was equivalent to 1.7% of the initial share count. Issuing shares at a premium avoids diluting existing Shareholders and provides a larger capital base over which to allocate costs.

At the AGM in February, we will be asking for authority to issue further shares without pre-emption rights up to 10% of the Company's shares in issue as at the date of this report. These will only be issued at a premium. The Board believes this resolution is in your interests and urges you to continue to support it.

As I have mentioned in previous statements, there is no inherent law that a company like ours should trade at a premium. The fact that it does so is a function of its strong retail shareholder base and the very low interest rates available to savers. These two factors may not last forever and if a persistent discount does emerge, we will resume buying back shares under our discount control policy. In addition, by issuing shares at a small premium to NAV and offering to buy back at a discount, we effectively become a market maker in our own shares and are able to provide greater liquidity to Shareholders than may be available from traditional market makers. We do not think it is in Shareholders' interest that the shares of this Company should become too detached from the underlying NAV.

Responsible investment

We recognise the growing importance of the application of the highest standards of environmental, social and governance practice in delivering sustainable long-term growth in capital and income. On pages 18 and 19 of the Report & Accounts we explain our approach towards responsible investment and give some examples of our Manager's engagement with the companies in which we invest.

Annual General Meeting ('AGM')

The AGM of the Company will take place on 11 February 2020 in Exchange House at 11.30am. Julian Cane will be making a presentation on the investment scene as well as reviewing the year just past. All of the Directors will be present to answer any questions you may have.

Our independent auditors, PricewaterhouseCoopers LLP ('PwC' or the 'auditors'), will be retiring from the role after the AGM after careful consideration of the rules on longevity of audit relationships. I thank them on behalf of the Board for their work during a long tenure. They will be replaced by BDO LLP, whose first audit will cover the financial year to 30 September 2020.

Directorate

I am delighted that Jonathan Cartwright joined the Board on 26 November as Chairman Designate bringing us a fresh perspective and a superb background to the role. Jonathan has great depth of knowledge, leadership and experience not only from his career in finance but also through senior board appointments. He will be standing for election by Shareholders at the AGM and I commend him to you with my very best wishes.

Sadly, he and I will overlap only briefly, as I will be retiring on 31 March 2020 after almost nine years at the wheel. During this period, the Company has done well in return terms, both absolutely and relatively, but that is down to your Fund Manager, Julian Cane. As is only right, the Board has been responsible for governance and oversight and has benefited from an excellent relationship with BMO Global Asset Management previously known as F&C Investments. I would like to thank Hugh Potter, our outstanding Company Secretary, for keeping us in line and Marrack Tonkin, BMO's Head of Investment Trusts, who is a beacon of common sense in what can be a treacherous sea. I would also like to

thank my Board colleagues for their help and guidance in directing the Company as well as for being professional and companionable in their dedication towards always meeting your expectations as Shareholders. Finally, I would like to thank Julian for his quiet professionalism over the years. They don't seem to be making them like that any more. I have very much enjoyed my time as Chairman of your Company and know that it remains in good hands.

Outlook

Markets are still supported by low interest rates, which hide a multitude of sins. Until the tide goes out in the shape of higher interest rates, even poorly run companies are able to stay afloat. In some industries, though, even cheap money is not enough. Most obviously (but not only) the retail sector, is being severely disrupted by new distribution channels.

Add to this the uncertainty about the future, which is depressing capital investment. It is likely that future productivity and growth rates will be damaged by this lack of spending and all this points to interest rates remaining low for an extended period. The thinking in central banks is that the global economy is not robust enough to withstand higher rates and there is too much debt to allow a significant slowdown or recession. Furthermore, inflation remains unnaturally subdued, and policies designed to reignite it have failed, most notably in Japan. This combination, perhaps surprisingly, is not especially negative for equity markets, but nor are we off to the races. The most likely trajectory is that markets will grind higher, generating modest but positive returns. In this environment, skilled stock selection is more important than ever, and in this case, I believe you are in safe hands.

Lastly, I would like to thank you for being Shareholders of this Company and I wish you all well for the future.

Steven Bates

Chairman

29 November 2019

Principal Risks and Future Prospects

The principal risks, both perceived and observed, together with their mitigations are described below. The Board's processes for monitoring them and identifying emerging risks are set out on pages 39 and 41 and in note 22 of the Report & Accounts. These are consistant with those reported in the prior year.

The principal risks identified as most relevant to the assessment of the Company's future prospects and viability were those relating to potential investment portfolio underperformance and its effect on the share price; discount movement; dividends; and threats to security over the Company's assets. Our risk evaluation forms an inherent part of our strategy determination described on page 8 of the Report and Accounts.

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

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

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

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

· Risk description: Inappropriate business or marketing strategy particularly in relation to investor needs or sentiment giving rise to a share price discount to NAV per share.

Unchanged throughout the year under review.

Mitigation: A Shareholder satisfaction survey is conducted every five years ahead of a vote on whether the Company should continue. The Board holds a separate meeting to consider strategy and associated Opportunities and threats and the performance and appointment of BMO GAM is also reviewed annually in terms of their delivery of sustainable long-term growth in capital and income. This includes the growing recognition of the importance of further development and application of the highest standards of ESG practice by the Manager. Share buybacks can be employed to help moderate extensive discount volatility, while share

issues can be made when the shares are trading at a premium.

Five Year Horizon

Through a series of connected stress tests ranging from moderate to extreme scenarios and based on historical information, but forward looking over the five years commencing 1 October 2019, the Board assessed the risks of :

· potential illiquidity of the Company's portfolio;

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

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

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

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

Statement of Directors' Responsibilities

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

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

· the Strategic report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that they face; and

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

On behalf of the Board

Steven Bates

Chairman

29 November 2019

Income Statement

for the year ended 30 September	2019			2018
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	3,878	3,878	-	6,841	6,841
Foreign exchange gains/(losses)	1	5	6	5	(6)	1
Income	14,810	459	15,269	13,143	-	13,143
Management fee	(667)	(667)	(1,334)	(688)	(688)	(1,376)
Other expenses	(547)	(3)	(550)	(519)	(11)	(530)
Net return before finance costs and taxation	13,597	3,672	17,269	11,941	6,136	18,077
Finance costs	(164)	(164)	(328)	(223)	(223)	(446)
Net return on ordinary activities before taxation	13,433	3,508	16,941	11,718	5,913	17,631
Taxation on ordinary activities	(7)	-	(7)	(8)	-	(8)
Net return attributable to Shareholders	13,426	3,508	16,934	11,710	5,913	17,623
Return per share - pence	13.12	3.43	16.55	11.70	5.90	17.60

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

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

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

Statement of Changes in Equity

for the year ended 30 September 2019
		Share	Capital				Total
	Share	premium	redemption	Special	Capital	Revenue	Shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 September 2018	25,265	125,380	4,146	4,434	155,053	13,194	327,472
Movements during the year ended 30 September 2019
Dividends paid	-	-	-	-	-	(11,505)	(11,505)
Ordinary shares issued	431	4,817	-	-	-	-	5,248
Net return attributable to Shareholders	-	-	-	-	3,508	13,426	16,934
Balance at 30 September 2019	25,696	130,197	4,146	4,434	158,561	15,115	338,149

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

Balance Sheet

at 30 September	2019	2018
	£'000s	£'000s
Fixed assets
Investments	343,066	341,034
Current assets
Debtors	1,275	1,582
Cash and cash equivalents	4,229	5,280
Total current assets	5,504	6,862
Current liabilities
Creditors: amounts falling due within one year	(421)	(390)
Bank overdrafts	-	(34)
Loans	(10,000)	(20,000)
Total current liabilities	(10,421)	(20,424)
Total assets less current liabilities	(4,917)	(13,562)
Net assets	338,149	327,472
Capital and reserves
Share capital	25,696	25,265
Share premium account	130,197	125,380
Capital redemption reserve	4,146	4,146
Special reserve	4,434	4,434
Capital reserves	158,561	155,053
Revenue reserve	15,115	13,194
Total Shareholders' funds	338,149	327,472
Net asset value per ordinary share - pence	328.99	324.04

Statement of Cash Flows

for the year ended 30 September	2019	2018
	£'000s	£'000s
Cash flows from operating activities before dividends received and interest paid	(1,355)	(1,830)
Dividends received	15,125	12,664
Interest paid	(332)	(450)
Cash flows from operating activities	13,438	10,384
Investing activities
Purchase of investments	(35,033)	(42,351)
Sale of investments	36,832	34,877
Other capital charges	(3)	(11)
Cash flows from investing activities	1,796	(7,485)
Cash flows before financing activities	15,234	2,899
Financing activities
Equity dividends paid	(11,505)	(10,803)
Net proceeds from issuance of new shares	5,248	8,189
Drawdown of loans	-	20,000
Repayment of loans	(10,000)	(20,000)
Cash flows from financing activities	(16,257)	(2,614)
Net movement in cash and cash equivalents	(1,023)	285
Cash and cash equivalents at the beginning of the year	5,246	4,962
Effect of movement in foreign exchange	6	(1)
Cash and cash equivalents at the end of the year	4,229	5,246
Represented by:
Cash at bank	399	-
Short term deposits	3,830	5,280
Bank overdrafts	-	(34)
	4,229	5,246

Notes

1 Return per ordinary share

Revenue return

The revenue return per share of 13.12p (2018: 11.70p) is based on the revenue return attributable to Shareholders of £13,426,000 profit (2018: £11,710,000 profit).

Capital return

The capital return per share of 3.43p (2018: 5.90p) is based on the capital return attributable to Shareholders of £3,508,000 profit (2018: £5,913,000 profit).

Total return

The total return per share of 16.55p (2018: 17.60p) is based on the total return attributable to Shareholders of £16,934,000 profit (2018: £17,623,000 profit).

Weighted average ordinary shares in issue

The returns per share are based on a weighted average of 102,301,049 (2018: 100,117,008) ordinary shares in issue during the year.

2 Dividends

The Directors have declared a fourth interim dividend in respect of the year ended 30 September 2019 of 3.75pence per share, payable on 30 December 2019 to all Shareholders on the register at close of business on 13December 2019.

3 Financial risk management

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

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

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

4 Annual general meeting

The annual general meeting will be held at the registered office of the Company, Exchange House, Primrose Street, London EC2A 2NY on Tuesday 11 February 2020 at 11.30 a.m.

5 Report and accounts

The report and accounts for the year ended 30 September 2019 will be posted to Shareholders and made available on the websitewww.bmocapitalandincome.comshortly. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

By order of the Board

BMO Investment Business Limited, Secretary

29 November 2019