Annual Financial Report

MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC ("MUSCIT") ANNUAL FINANCIAL REPORT 2014 The full Annual Report and Accounts for the year ended 31 March 2014 can be found on the Company's website: www.montanarouksmaller.co.uk. INVESTMENT OBJECTIVE MUSCIT's investment objective is capital appreciation through investing in small quoted companies listed on the London Stock Exchange or traded on the Alternative Investment Market ("AIM") and to achieve relative outperformance of its benchmark, the Numis Smaller Companies Index (excluding Investment Companies) ("NSCI"). No unquoted investments are permitted. HIGHLIGHTS FOR THE YEAR ENDED 31 MARCH 2014 Results Net Asset Value +11% Â£197m ("NAV") NAV (excluding +11%* Â£194m current period revenue) Gross assets +10% Â£213m Share price +16% Â£169m** Numis Smaller +23%â€ Companies Index*** * Calculated using AIC guidelines. ** Market capitalisation. *** Excluding Investment Companies. â€ Capital only. Year to Year to 31 March 31 March 2014 2013 Revenue return on ordinary 2,625 2,350 activities (Â£'000) Movement in capital reserve 19,399 30,916 (Â£'000) Revenue return per Ordinary 7.84p 7.02p share Dividend per Ordinary share 7.50p 6.76p Total return per Ordinary 65.79p 99.37p share As at As at 31 March 31 March 2014 2013 Ordinary share price 505.50p 437.00p NAV per Ordinary share 588.22p 529.19p NAV (excluding current period 580.38p 522.17p revenue) per Ordinary share STRATEGIC REPORT The Strategic Report has been prepared in accordance with Section 414A of the Companies Act 2006 ("the Act"). Its purpose is to inform members of the Company and help them to assess how the Directors have performed their duty under Section 172 of the Companies Act 2006 to promote the success of the Company for the benefit of shareholders. CHAIRMAN'S STATEMENT Highlights 2014 During the year ended 31 March 2014, the Company's share price increased by 16% to 505.50p, representing a discount to the NAV (excluding current period revenue) per share of 13%, compared to 16% at the start of the year. The NAV per share increased by 11% to 588.22p. This compares with an increase of 23% in the benchmark index, the NSCI. Results For my first year as Chairman I am pleased to report a double digit increase in our net asset value and share price to all time high levels in what has been a very broad based revaluation for mid and smaller companies in most developed markets. In the UK this was reflected by a capital return for our benchmark (NSCI) of 22.7% versus 5.2% for the All-Share Index. On this basis the Board has decided to increase the dividend by 10.9% in line with increased earnings. I am, however, most disappointed that our geared portfolio has not provided better results versus the benchmark and the peer group. It has been a deeply frustrating year for our Investment Manager, whose distinct quality growth style has been eclipsed by a market favouring value and recovery stocks. Overview The key objective of the Company is to achieve long-term capital growth in returns for investors. It is pleasing to report that, since launch in March 1995, the NAV per share has increased by 488.7% compared with an increase of 109.5% in the benchmark* index. This represents outperformance of the benchmark in 14 out of 19 financial years. The Manager, Montanaro Asset Management Limited ("Montanaro"), has not changed its investment approach, continuing to invest in companies which have strong management teams, sound balance sheets and good business franchises, and which it believes offer the potential for favourable long-term returns. Montanaro has a good long-term record which is based on investing in such companies. As reported in the Half-Yearly Report, with effect from 1 April 2014, the investment management fee decreased from 1% pa to 0.85% pa of gross assets. In addition, the performance fee was removed. Your Board believes that these fee reductions will provide a more competitive and simpler management fee structure. In addition, this will make fee comparisons with other investment vehicles easier. The Board believes that shareholders will continue to benefit from Montanaro's expertise and its detailed research capabilities in the UK smaller companies sector. Regulation The Company will be caught by a number of new regulations originating from outside the UK, which will place a greater administrative and cost burden on it. The Alternative Investment Fund Managers' Directive ("AIFMD") has been discussed over several years and will fully come into force on 22 July 2014. Your Board has been working with its advisers to comply with this regulation and has agreed to appoint the Investment Manager as its Alternative Investment Fund Manager ("AIFM") and intends to appoint The Bank of New York Mellon as its Depository and Custodian. The necessary applications have been made and the Company expects to be fully compliant this July. The Company has registered for the American derived Foreign Account Tax Compliance Act ("FATCA"). This will enable the Company to be exempted from the full administrative burden of reporting on its shareholders. Directors On behalf of the Board and management team, I should like to extend my thanks to our former chairman, David Gamble, who chaired the Board with great flair and skill from January 2005 until July 2013, a difficult act to follow. We are fortunate to have appointed James Robinson to the Board in September 2013, who provides a wide range of investment experience combined with an accountancy background. Michael Moule, who has been a Director for nine years, has indicated that he intends to retire at the Company's AGM in 2015, so we will search for a new Director later this year. Michael Moule will hand over the chair of the Audit Committee to James Robinson at our forthcoming AGM. Each year the Directors go through a rigorous appraisal of the Board and its Committees and assess how best it can function. A lively four person board works well for a trust of this size. * Previous benchmark of FTSE SmallCap (excluding investment companies) to 31 March 2013 and NSCI from 1 April 2013. KATHRYN MATTHEWS Chairman 23 June 2014 MANAGER'S REPORT We remain confident that we hold a portfolio of exceptional companies that will generate sustainable and growing free cash flows. We believe such companies will deliver substantial shareholder value for years to come, as they have in the past, irrespective of market trends, cycles or investor sentiment. * The SmallCap market gives investors access to global market-leading companies managed by dynamic entrepreneurs operating in attractive niche markets that are growing. * Montanaro is well positioned to benefit from a return of investor appetite for the highest quality UK SmallCap. Breakdown by Market Cap (Ex Cash) Market Cap Percentage Â£50-Â£100m 0% Â£100-Â£200m 1% Â£200-Â£300m 6% Â£300-Â£600m 26% More than Â£600m 67% Breakdown by Index (Ex Cash) Index Percentage FTSE 100 0% FTSE 250* 13% Numis Smaller Companies 87% UK AIM 0% * Represents those holdings that are in the FTSE 250 and are above the threshold for Numis Smaller Companies holdings. Montanaro Montanaro was established in 1991. We have one of the largest and most experienced specialist teams in the UK dedicated exclusively to research and investing in quoted European smaller companies. We have a team of 28 investment professionals ensuring that we have the benefit of local contacts and knowledge that is so essential to detailed and thorough research. At 31 March 2014, Montanaro's funds under management were over Â£2.7 billion. Investment Philosophy and Approach Montanaro specialises in quoted UK and European smaller companies with a particular focus on those with a stock market value below Â£2.5 billion. Investment ideas typically are generated internally - rather than through brokers - and are researched in detail in-house. With around 2,000 companies currently within our universe, we are spoiled for choice. There is never a shortage of exciting new ideas. Before conducting detailed research on an individual company, we gather and carefully review extensive trade and industry data to help us to understand the sector in which a company operates and its growth drivers. Investments are focused exclusively on companies that are profitable. We are mindful of our 'circle of competence' - complicated, blue-sky companies are not for us. We focus on companies we can understand, typically niche franchises with good and experienced management, sound finances, simple business models, good order visibility, high barriers to entry, a strong, normally dominant market position and a competitive advantage that ensures pricing power. If there is a choice of more than one company in a specific sector, we would normally invest in the market leader. We prefer companies that can demonstrate self-funded organic growth rather than those on the acquisition treadmill. We believe that you "get what you pay for in life" - it is worth paying more for a higher quality company. We like cash generative companies with high operating profit margins - an indicator that they are providing goods or services of value to their clients - which are better able to withstand a downturn. We carefully assess potential catalysts for share price performance such as positive news flow. We never lose sight of our primary goal which is to make money for shareholders through sound investment based on our own rigorous, fundamental analysis. We take a conservative approach. We also believe that it is right and proper to align our interests with those of our investors - we invest in our own funds. To ensure that we remain well informed, we regularly visit the companies in which we invest. This is the fun part of the job and where we feel we can add the most value. We place great emphasis on management and seek to gain an understanding of their goals and aspirations by seeing them operate in their own environment. It is a privilege to meet them. The track record of executives is examined in detail along with board structure, the level of insider ownership and the emphasis placed by management on sound corporate governance. Good communication and regular dialogue with management are an important part of our investment process. We are more interested in where an industry and a specific company will be in 5-10 years than its next set of figures. We are genuine long-term investors, seemingly an increasing rarity these days. We believe that the major risk of investing in quoted UK SmallCap is stock specific. Having probably the UK's largest SmallCap specialist team, a high level of resources and a disciplined investment process means that we are well equipped to manage this company specific risk. In addition, we have a number of risk controls aimed at limiting our exposure to a particular sector or company. For example, if a stock reaches a 4% weighting in the portfolio, we will automatically reduce our exposure even if we believe the outlook is still positive - no company is immune to external shocks or unexpected surprises. In summary, we invest in well managed, high quality companies in growth markets at sensible valuations. We are long-term investors and keep turnover and transaction costs low. We follow the companies in which we invest very closely over many years, measured more in decades than the short-termism of others. We would rather pay more for a higher quality, more predictable company that can be valued with greater certainty. We like to sleep at night. The Portfolio The portfolio at 31 March 2014 consisted of 54 companies, of which the top ten holdings represented 26%. The focus has been, and continues to be, on companies with a market capitalisation of less than Â£1.8 billion. Sector distribution within the portfolio is driven by stock selection. Although weightings relative to the market are monitored, overweight and underweight positions are held based on where the greatest value is perceived to be. Review 2013/14 was a positive year for investors in UK SmallCap, with the NSCI benchmark index recording a strong performance with a capital return of 23%. In comparison, the Company's NAV increased by 11%. Although the UK SmallCap market overall saw a solid performance, there was a significant divergence in returns between the types of companies. Mario Draghi's speech in July 2012, promising to "do whatever it takes" to defend the Euro, combined with signs of economic recovery in the UK, significantly increased investors' risk appetite. As a consequence, high quality, global growth companies were sold in order to buy lower quality, cyclical value stocks - a "risk on" trade which has continued ever since. This largely accounts for the relative underperformance of the Company. Leading economic indicators began pointing to expansion for the UK economy early in the year and strengthened significantly thereafter. Europe, which remains the UK's largest trading partner, saw a similar improvement, albeit later and with less acceleration. 2014 GDP growth estimates for the UK gradually increased from 1.5% in the Spring of 2013 to 2.7% by the fiscal year end. With monetary policy remaining loose throughout the developed world, UK equities rallied. However, emerging markets remained under pressure and saw their currencies weaken, in some cases substantially. This was an unhelpful development for global exporters, coming just as their more domestically oriented counterparts were benefitting from the tailwinds of local economic growth and improving sentiment in Europe. Nevertheless, the end of the calendar year brought some glimmers of hope to quality growth investors such as Montanaro. The lower quality, value stocks, which had moved from pricing in a distressed environment to pricing in growth, generally produced lukewarm results. Meanwhile, the companies which were global market leaders a year ago unsurprisingly remained so, irrespective of their relative underperformance. We are long-term investors with a track record built on investing in the highest quality companies that are growing. This will not change. While it is always disappointing to underperform, especially by such a large margin, it has not been surprising in an environment that has favoured higher risk investment. However, we remain confident that we hold a portfolio of exceptional companies that will generate sustainable and growing free cash flows. We believe such companies will deliver substantial shareholder value for years to come, as they have in the past, irrespective of market trends, cycles or investor sentiment. Gearing The Board determines levels of gearing following recommendation from the Manager. In 2013, the Company started the fiscal year with a low level of borrowing at 1.2%. The level was slowly increased from Autumn, reaching over 7.4% by end of January. Gearing at the fiscal year-end was 6.5%. Outlook Investors in UK SmallCap have now enjoyed two consecutive years of strong returns. A large portion of these returns have been the result of multiple expansion rather than an improvement in company earnings. The foundations of the bull market remain intact - bond yields remain exceptionally low and economic conditions have improved. However, for share prices to continue to advance, earnings growth has to be delivered. We remain confident in the ability of our companies to grow, as do the management teams in charge of them. After nearly two years of outperformance by low quality, value companies, the relative premium investors are paying for quality growth has fallen substantially. The Company is well positioned to benefit from a return of investor appetite for the highest quality UK SmallCap. As investors increasingly focus on earnings growth, they are likely to turn to quality companies that are more likely to deliver. We look forward to the next twelve months with confidence. Montanaro Asset Management Limited 23 June 2014 THE COMPANY MUSCIT is a closed-ended investment trust listed on the London Stock Exchange with registration number 3004101. It has been granted approval from HM Revenue & Customs ("HMRC") as an investment trust under s1158/1159 of the Corporation Tax Act 2010 ("s1158/1159") for the year ended 31 March 2013, and for each subsequent accounting period, subject to there being no serious breaches of the conditions for approval. New rules introduced by HMRC removed the maximum holding in any one investment of 15% and replaced this with a risk diversification approach. The Board has considered this and agreed that the Company's Investment Policy offers suitable risk diversification. MUSCIT is also an investment company as defined in Section 833 of the Companies Act 2006. The current portfolio of MUSCIT is such that its shares are eligible for inclusion in an ISA up to the maximum annual subscription limit and the Directors expect this eligibility to be maintained. INVESTMENT OBJECTIVE MUSCIT's investment objective is capital appreciation (rather than income) achieved by investing in small quoted companies listed on the London Stock Exchange or traded on AIM and to achieve relative outperformance of its benchmark, the NSCI. No unquoted investments are permitted. The Attractions of Quoted Smaller Companies ("SmallCap") The key attraction of investing in SmallCap is that investors have the opportunity to make higher returns than from investing in large companies ("LargeCap"). It is easier for small companies to grow faster than it is for large companies; hence they offer investors the potential for higher earnings growth. In the UK, research shows that, since 1954, SmallCap equities have outperformed LargeCap by an average of 3.5% per annum ("the SmallCap Effect"). As a result, investors have received six times higher returns. The SmallCap market gives investors access to global market-leading companies managed by dynamic entrepreneurs operating in attractive niche markets that are growing. However, due to a lack of broker research and the illiquidity of their shares, it takes a lot of time to get to know and understand these companies. This requires a level of in-house resources beyond the scope of most institutional investors. This is why many institutions are attracted to the asset class and equally why they will often outsource the day-to-day investment decisions to dedicated specialists such as Montanaro Asset Management Limited. INVESTMENT POLICY The Company seeks to achieve its objective and to diversify risk by investing in a portfolio of quoted UK smaller companies. At the time of initial investment, a potential investee company must be profitable and no bigger than the largest constituent of the NSCI, which represents the smallest 10% of the UK Stock Market by value. At the start of 2014, this was any company below Â£1.8 billion in size. The Manager focuses on the smaller end of this Index. In order to manage risk the Manager will normally limit any one holding to a maximum of 4% of the Company's investments. The portfolio weighting of each investment is closely monitored to reflect the underlying liquidity of the particular company. The Company's AIM exposure is also closely monitored by the Board and is limited to 30% of total investments with Board approval required for exposure to be above 25%. The Manager is focused on identifying high quality niche companies operating in growth markets. This typically leads the Manager to invest in companies that enjoy high barriers to entry, pricing power, a sustainable competitive advantage and strong management teams. The portfolio is therefore constructed on a "bottom up" basis and there are no sectoral constraints placed on the Manager. The Board, in consultation with the Manager, is responsible for determining the gearing strategy of the Company. Gearing is used to enhance returns when the timing is considered appropriate. The Company currently has credit facilities of Â£25 million through ING Bank of which Â£15 million was drawn as at 31 March 2014. The Board has agreed to limit borrowings to 25% of shareholders' funds. COMPANY INFORMATION Share Buy Backs The Board is responsible for share buy backs which are undertaken at arm's length by the Manager. No shares were bought back during the year. Holding Shares in Treasury Since December 2003, investment trusts have had the right to buy back shares and hold them in Treasury for re-issue at a later date. This has the benefit of improving liquidity as well as retaining the opportunity to enhance the NAV. The Board has actively and carefully considered the use of Treasury shares and had been among the industry's pioneers. Our policy is to ensure that shareholders receive a tangible benefit above and beyond an enhanced ability to manage the liquidity of the shares of MUSCIT. Shares held in Treasury will only be re-issued at a lower discount than when they were originally purchased and to produce a positive absolute return. As at 31 March 2014 no shares were held in Treasury. Borrowings The Board determines borrowing levels following recommendations from the Manager and reviews this formally at each Board meeting. At the end of the year, the Company had borrowings (net of cash) of 6.5% of the NAV compared to 1.2% at the beginning of the year. Gearing continued to be used actively during the year within ranges approved by the Board. Benchmark Following a review to assess the most appropriate benchmark against which its performance should be measured, the Company adopted the NSCI on 1 April 2013. There will continue to be no change in the investment approach or objectives. Dividends MUSCIT's primary focus is on capital growth rather than income. The results for the year are as set out in the Income Statement. The Directors recommend that a final dividend of 7.50p (2013: final 6.76p) per Ordinary share, amounting to Â£2,511,000 (2013: final Â£2,263,000) be paid on 13 August 2014 to shareholders on the share register at the close of business on 4 July 2014. Directors Mr Gamble retired from the Board on 26 July 2013, due to personal reasons and other commitments. Following Mr Gamble's retirement, Ms Matthews was appointed Chairman. Mr Robinson was appointed as a Director on 30 September 2013. Corporate Governance The Directors have reviewed the recommendations of the AIC Code of Corporate Governance (the "AIC Code") and have implemented procedures where appropriate, such as an annual evaluation of the Board's performance. MUSCIT has complied with the AIC Code throughout the year except where compliance would be inappropriate given the size and nature of the Company. Full disclosure of MUSCIT's compliance with the AIC Code is included in the Directors' Report. The Manager has signed up to the Stewardship Code and has published its voting records on its website. AIFMD The AIFMD relates to European legislation that creates a European-wide framework for regulating managers of alternative investment funds ("AIFs"). Closed-ended investment companies fall within the remit of these new regulations will fully come into force on 22 July 2014. The Board has reviewed the impact of AIFMD on the Company's operations and has decided to appoint Montanaro as the Company's AIFM. Under the AIFMD, the Company intends to appoint The Bank of New York Mellon as Depositary and Custodian. DESCRIPTION OF PRINCIPAL RISKS ASSOCIATED WITH MUSCIT The Board carefully considers the principal risks for MUSCIT and seeks to manage these risks through continual and regular review, policy setting, compliance with and enforcement of contractual obligations and active communication with the Manager, the Administrator and shareholders. The Board applies the principles detailed in the recommendations of the AIC Code as described above. Details of MUSCIT's internal controls may be found in the Corporate Governance section of the full Annual Report and Accounts. Mitigation of the principal risks is sought and achieved in many ways as shown below: Investment Manager: Montanaro has been the Manager of MUSCIT since its launch in 1995. The success of MUSCIT and its long-term performance is largely attributable to Montanaro. Should the current Manager not be in a position to continue its management of the Company, performance may be impacted. The Board meetings are attended by the Manager. Montanaro has a large, multi-national specialist team based in the UK. Succession planning within Montanaro and recruitment of personnel are closely monitored by the Board. Investment & Strategy: MUSCIT may underperform its benchmark as a result of poor stock selection, style bias, sector allocation or as a result of being geared in a falling market. The Manager meets regularly with the Board to discuss portfolio performance and strategy, and provides the Board and shareholders with regular reports. The portfolio is well diversified thereby spreading investment risk and reducing stock specific risk. The Board receives and reviews a regular report of all transactions and, through the forum of its Management Engagement Committee, formally reviews the performance of the Manager on an annual basis. Gearing: one of the benefits of closed-end investment trusts is the ability to use borrowings which can enhance returns in a rising stock market. However, gearing exacerbates movements in the net asset value both positively and negatively and will exaggerate declines in net asset value when prices of quoted UK small companies are falling. The Board monitors and discusses with the Manager the appropriate level of gearing and cash balances of MUSCIT at each Board meeting. The Board agreed with the Manager in December 2011 to take out a Â£15 million five-year borrowing commitment to December 2016. In February 2014, the Board agreed with the Manager to take out an additional Â£10 million three-year loan facility to February 2017. The gearing facility has increased in proportion with the size of the portfolio. Portfolio Liquidity: as with all small company investment trusts, there are times when the liquidity of the underlying portfolio is poor, such as when small companies are out of favour or during periods of adverse economic conditions. The Manager focuses on "smaller" companies where the opportunities may be more attractive but this can increase overall underlying illiquidity. This may result in the Manager being unable to buy or sell individual holdings within the portfolio. In addition, this may impact the discount of MUSCIT's share price to the net asset value of the portfolio. One of the benefits of investment trusts is that generally the Manager is not forced to buy or sell individual holdings at inopportune times. The Manager constantly reviews the underlying liquidity of the portfolio, which is well-diversified. Particular attention is paid to any AIM holdings, with the Manager providing the Board with liquidity reports at every meeting. Montanaro deals with a wide range of brokers to enhance its ability to execute and minimise liquidity risk. Liquidity of MUSCIT Shares: as with many small company investment trusts, there are times when the liquidity of the shares of MUSCIT is low. In the case of MUSCIT, many of the shareholders are large financial institutions with a long-term investment horizon. Unlike other investment trusts where private individuals form a larger part of the share register, this may result in fewer shares being traded in MUSCIT on a daily basis and make it difficult at times for investors to buy or sell shares of MUSCIT. The Manager is encouraged by the Board to market the strong investment story of MUSCIT to other potential new investors. The goal is to widen the shareholder base to enhance liquidity. In addition, the ability to buy back shares to be held in Treasury for subsequent re-issue enhances the liquidity of MUSCIT's shares. Discount Volatility: as with all small company investment trusts, the discount can fluctuate significantly both in absolute terms and relative to its peer group. The Board actively monitors the discount of MUSCIT and is responsible for share buy backs or issuance from Treasury. Share buy backs may help to reduce the discount. During the year and up to the date of this report, MUSCIT has not used the authority granted at the Annual General Meeting held in 2013 to make market purchases of up to 5,018,046 Ordinary shares. No Ordinary shares are currently held in Treasury. The Board encourages the Manager to market MUSCIT to new investors to increase demand for its shares, which may help to increase liquidity and reduce the discount. Regulatory: a breach of s1158/1159 might lead to MUSCIT being subject to capital gains tax. A breach of the rules of the London Stock Exchange might result in censure by the FCA and/or suspension of MUSCIT's listing on the London Stock Exchange. The Board has agreed a service level agreement with the Manager which includes active and regular review of compliance with s1158/1159 and compliance with the Company's published Investment Policy. During the year under review the Administrator reviewed compliance with FCA and London Stock Exchange Rules. This is reviewed at each Board meeting. The Board has been monitoring the progression of the AIFM Directive and has been actively discussing options with providers. This will ensure that the Company will be able to comply with its requirements when the Directive is fully implemented on 22 July 2014. The Company could also lose its investment trust company status if it became a close company at any time during the accounting period. The Board reviews the share register at each meeting to ensure it does not become a close company. The Board acknowledges that it has no control over shareholders purchasing shares, nor their concentration on the share register. Operational: if the Administrator's operational procedures proved deficient and its core accounting systems failed, accounting errors might occur resulting in inaccurate net asset valuations, performance data and possibly a qualified audit report and/or loss of s1158/1159 status. The Board monitors operational issues regularly and reviews them in detail at each Board meeting. Financial: inappropriate accounting policies or failure to comply with current or new Accounting Standards might lead to a breach of regulations and/or loss of investment trust company status. The Board monitors financial issues regularly and reviews them in detail at each Board meeting. Banking: a breach of MUSCIT's loan covenants might lead to funding being summarily withdrawn and investment holdings potentially being sold at a time of poor liquidity. The main financial covenants to which the Company is subject in respect of the ING Bank N.V. revolving credit facilities require it to ensure that total borrowings will not exceed 30% of the adjusted NAV at any time and that the adjusted NAV does not fall below Â£65,000,000 at any time. The Board monitors compliance with banking covenants regularly and reviews them with the Administrator and Manager at each Board meeting. The Company has entered into an interest rate swap agreement; the fair value of this is disclosed in note 15 of the financial statements. Reputational: inadequate or deficient controls of the Administrator or Manager or other third-party providers might result in breaches of regulations and damage the trust and confidence of shareholders in MUSCIT, leading to a widening of the discount. The Board continually monitors and reviews issues that may impact the standing of MUSCIT. Failure to keep current and potential investors informed of the Company's performance and development could result in fewer shares being traded in MUSCIT on a daily basis and also lower investor confidence. The Board and Manager maintain clear and frequent communication with shareholders and potential investors and are both happy to meet with shareholders. Company Viability: through falling NAV, or a reduction in the size of the Company through purchases of its own shares, the size of the Company could make its continuing existence unviable in the opinion of investors. The Board actively monitors the discount of MUSCIT and is responsible for share buy backs for cancellation or holding in Treasury. The resultant size of the Company is an important consideration of the decision to undertake buy backs. ANALYSIS OF PERFORMANCE USING KEY PERFORMANCE INDICATORS ("KPIs") The Board reviews performance by reference to a number of KPIs and considers that the most relevant KPIs are those that communicate the financial performance and strength of the Company as a whole. The Board and the Manager monitor the following KPIs: The NAV The NAV per Ordinary share, including revenue reserves, at 31 March 2014 was 588.22p (2013: 529.19p). Over the previous ten years and since launch the NAV has increased by 233% (2013: 345%) and 489% (2013: 430%) respectively. In comparison, the benchmark has increased by 42% (2013: 93%) over the previous ten years and 109% (2013: 87%) since launch. The level of discount The discount of MUSCIT's share price to NAV (excluding current period revenue) stood at 13% on 31 March 2014 in comparison with a weighted sector average of 9%. The Ongoing Charges 2014 2013 Ongoing Charges 1.30% 1.30% Performance fees - - Finance costs 0.40% 0.40% Total Ongoing Charges plus 1.70% 1.70% performance fees and finance costs Further KPIs are those which show the Company's position in relation to the investment trust tests which it is required to meet and maintain its investment trust status. SOCIALLY RESPONSIBLE INVESTMENT The Company has no employees and the Board is comprised entirely of non-executive Directors. Day-to-day management of the Company's business is undertaken by Montanaro as the Investment Manager. Montanaro receives independent third party corporate governance research and will usually vote in line with International Corporate Governance Network policies. Where possible, it engages with management teams before an AGM or EGM prior to any decision to abstain or vote against a board's recommendation. In carrying out business with its suppliers, the Company aims to conduct itself responsibly, ethically and fairly. ENVIRONMENTAL, HUMAN RIGHTS, EMPLOYEE, SOCIAL AND COMMUNITY ISSUES The Board recognises the requirement under Section 414C of the Act to detail information about environmental matters, human rights, social and community issues, including information about any policies it has in relation to these matters and the effectiveness of these policies. These requirements do not apply to the Company as it has no employees, all the Directors are non-executive and it has outsourced its functions to third party service providers; the Company has therefore not reported further in respect of these provisions. GENDER DIVERSITY As at 31 March 2014, the Board of Directors comprised of three male Directors and one female Director, who is also Chairman. Appointments to the Board are made according to a person's existing knowledge and expertise taking into account the Company's strategic priorities. On behalf of the Board KATHRYN MATTHEWS Chairman 23 June 2014 TEN LARGEST HOLDINGS as at 31 March 2014 (26% of the portfolio) Berendsen PLC - Support Services Provider of textile cleaning and maintenance services. Â£6.15m 2.9% Â£1,929m Value Portfolio Market cap Mears Group PLC - Support Services Provider of social housing maintenance and domestic care services. Â£5.95m 2.8% Â£529m Value Portfolio Market cap Hilton Food Group plc - Food Producers International specialist meat packing to the retail sector. Â£5.74m 2.7% Â£364m Value Portfolio Market cap Consort Medical PLC - Health Care, Equipment and Services Medical device technologies for drug delivery. Â£5.72m 2.7% Â£274m Value Portfolio Market cap Big Yellow Group PLC - Real Estate/Real Estate Investment Trusts A REIT focused on the self-storage market. Â£5.47m 2.6% Â£774m Value Portfolio Market cap SuperGroup Plc - Personal Goods Retailer and owner of the SuperDry brand. Â£5.29m 2.5% Â£1,382m Value Portfolio Market cap NCC Group PLC - Software and Computer Services Software business specialising in escrow and cyber security. Â£5.25m 2.5% Â£391m Value Portfolio Market cap Innovation Group PLC - Software and Computer Services Provider of claims handling software services to the motor and property insurance markets. Â£5.16m 2.5% Â£419m Value Portfolio Market cap James Fisher PLC - Industrial Transportation Deep sea diving and marine engineering specialist to the offshore oil market. Â£5.12m 2.4% Â£733m Value Portfolio Market cap Brewin Dolphin Holdings PLC - Financial Services UK investment management and financial planning firm. Â£5.07m 2.4% Â£928m Value Portfolio Market cap INVESTMENT PORTFOLIO as at 31 March 2014 % of % of Market portfolio portfolio Value cap 31 March 31 March Holding Sector Â£'000 Â£m 2014 2013 Berendsen Support Services 6,149 1,929 2.9 Mears Group Support Services 5,947 529 2.8 2.4 Hilton Food Food Producers 5,744 364 2.7 Group Consort Medical Health Care, Equipment and 5,716 274 2.7 2.9 Services Big Yellow Group Real Estate/Real Estate 5,465 774 2.6 Investment Trusts SuperGroup Personal Goods 5,292 1,382 2.5 NCC Group Software and Computer 5,250 391 2.5 2.6 Services Innovation Group Software and Computer 5,160 419 2.5 Services James Fisher Industrial Transportation 5,120 733 2.4 3.0 Brewin Dolphin Financial Services 5,070 928 2.4 2.3 Holdings Victrex Chemicals 5,022 1,711 2.4 2.8 RPS Group Support Services 5,002 690 2.4 3.0 Jupiter Fund Financial Services 4,890 1,834 2.3 Management Helical Bar Real Estate/Real Estate 4,672 442 2.2 1.7 Investment Trusts Brammer Support Services 4,636 633 2.2 3.6 Domino Printing Electronic and Electrical 4,562 884 2.2 3.5 Sciences Equipment AG Barr Beverages 4,453 712 2.1 1.6 Marshalls Construction and Materials 4,425 353 2.1 0.9 Clarkson Industrial Transportation 4,406 465 2.1 1.5 Cineworld Group Travel and Leisure 4,350 819 2.1 Twenty Largest Holdings 101,331 48.1 Bovis Homes Household Goods and Home 4,298 1,201 2.1 Group Construction Senior Aerospace and Defence 4,167 1,283 2.0 2.8 Cranswick Food Producers 4,130 598 2.0 0.7 Telecom Plus Fixed Line 4,119 1,431 2.0 Telecommunication Dialight Electronic and Electrical 4,084 295 2.0 2.7 Equipment Xaar Electronic and Electrical 4,033 714 1.9 Equipment Entertainment Media 4,016 954 1.9 One Dechra Pharmaceuticals and 4,008 586 1.9 3.8 Pharmaceuticals Biotechnology Ted Baker Personal Goods 3,974 938 1.9 Kcom Group Fixed Line 3,770 512 1.8 Telecommunication Aveva Group Software and Computer 3,769 1,338 1.8 2.6 Services Restaurant Group Travel and Leisure 3,636 1,431 1.7 Diploma Support Services 3,587 812 1.7 Dairy Crest Food Producers 3,434 661 1.6 Group Fenner Industrial Engineering 3,411 773 1.6 2.8 Renishaw Electronic and Electrical 3,315 1,419 1.6 2.6 Equipment Halma Electronic and Electrical 3,312 2,176 1.6 0.9 Equipment EnQuest Oil and Gas Producers 3,286 995 1.6 3.3 Dunelm Group General Retailers 3,215 1,914 1.5 Paypoint Support Services 3,149 777 1.5 Hunting Oil Equipment, Services and 3,037 1,279 1.5 Distribution Telecity Group Software and Computer 2,980 1,415 1.4 0.9 Services Rathbone Financial Services 2,662 864 1.3 1.6 Brothers Euromoney Media 2,654 1,535 1.3 Institutional Investor Hellermanntyton Electronic and Electrical 2,608 702 1.2 Group Equipment Shaftesbury Real Estate/Real Estate 2,467 1,828 1.2 2.9 Investment Trusts Wilmington Group Media 2,446 200 1.2 1.1 Galliford Try Construction and Materials 2,322 1,092 1.1 Latchways Support Services 2,260 116 1.1 2.1 Domino's Pizza Travel and Leisure 2,206 912 1.1 3.4 Group Dignity General Retailers 2,041 787 1.0 4.0 Ocean Wilson Industrial Transportation 2,006 387 1.0 1.7 Holdings Devro Food Producers 1,863 394 0.9 3.4 ITE Group Media 1,815 477 0.9 Total Portfolio 209,411 100.0 ANALYSIS OF INVESTMENT PORTFOLIO BY INDUSTRIAL OR COMMERCIAL SECTOR as at 31 March 2014 Sector % of portfolio % of NSCI Oil and Gas Producers 1.6 3.2 Oil Equipment, Services and Distribution 1.5 1.7 Alternative Energy - 0.1 Oil and Gas 3.1 5.0 Chemicals 2.4 3.0 Industrial Metals - 0.6 Mining - 3.6 Basic Materials 2.4 7.2 Construction and Materials 3.2 2.9 Aerospace and Defence 2.0 2.8 General Industrials - 1.5 Electronic and Electrical Equipment 10.5 4.1 Industrial Engineering 1.6 2.3 Industrial Transportation 5.5 1.7 Support Services 14.6 12.1 Industrials 37.4 27.4 Automobiles and Parts - - Beverages 2.1 0.8 Food Producers 7.2 2.7 Household Goods 2.1 2.6 Leisure Goods - 0.4 Personal Goods 4.4 1.4 Consumer Goods 15.8 7.9 Health Care, Equipment and Services 2.7 2.1 Pharmaceuticals and Biotechnology 1.9 1.2 Health Care 4.6 3.3 Food and Drug Retailers - 0.9 General Retailers 2.5 5.9 Media 5.3 3.4 Travel and Leisure 4.9 8.4 Consumer Services 12.7 18.6 Fixed Line Telecommunications 3.8 2.8 Telecommunications 3.8 2.8 Electricity - 0.6 Gas, Water & Multi-utilities - 0.1 Utilities - 0.7 Banks - 0.5 Life and Non-life Insurance - 3.5 Real Estate 6.0 9.3 Financial Services 6.0 5.8 Financials 12.0 19.1 Software and Computer Services 8.2 4.9 Technology Hardware & Equipment - 3.1 Technology 8.2 8.0 Total 100.0 100.0 The investment portfolio comprises 54 listed UK equity holdings. There are no holdings traded on AIM. BOARD OF DIRECTORS Kathryn Matthews - Chairman Roger Cuming Michael Moule James Robinson EXTRACTS FROM THE DIRECTORS' REPORT SHARE CAPITAL There are currently 33,475,958 Ordinary 10p shares in issue (2013: 33,475,958), none of which are held in Treasury (2013: nil). Holders of Ordinary shares have unrestricted voting rights of one vote per share at all general meetings of the Company. Going Concern At the 2013 Annual General Meeting of the Company, an Ordinary Resolution was passed releasing the Directors from the obligation to convene a General Meeting during 2014 for the purpose of proposing for the Company to be wound-up on a voluntary basis as stated in the Company's Articles of Association. The Company will be required to propose a Resolution at a General Meeting every five years thereafter unless, at any Annual General Meeting held within, and not more than, 18 months prior to the expiry of the relevant period of five years, an Ordinary Resolution is passed releasing the Directors from the obligation to convene such a General Meeting. The Directors, after due consideration of the Company's cash balances, the liquidity of the Company's investment portfolio and the cost base of the Company, are of the opinion that it is appropriate to presume that the Company will continue in business for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis, consistent with previous years. The full Annual Report and Accounts contain the following statements regarding responsibility for the financial statements. STATEMENT OF DIRECTORS' RESPONSIBILITIES in respect of the Annual Report and the Financial Statements The Directors are responsible for preparing the Annual Report, Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to: â— select suitable accounting policies and then apply them consistently; â— make judgements and estimates that are reasonable and prudent; â— state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and â— prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors confirm to the best of their knowledge: â— the financial statements, prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and return of the Company; and â— the Strategic Report and the Directors' Report 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 it faces; and â— 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 performance, business model and strategy. On behalf of the Board KATHRYN MATTHEWS Chairman 23 June 2014 NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 March 2014 or 31 March 2013 but is derived from those accounts. Statutory accounts for the year ended 31 March 2013 have been delivered to the Registrar of Companies and statutory accounts for the year ended 31 March 2014 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor's reports can be found in the Company's full Annual Report and Accounts at www.montanarouksmaller.co.uk. INCOME STATEMENT for the year to 31 March 2014 Year to 31 March 2014 Year to 31 March 2013 Revenue Capital Total Revenue Capital Total Notes Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Gains on investments 10 - 20,352 20,352 - 32,574 32,574 designated as fair value through profit or loss Dividends and interest 2 4,371 - 4,371 3,844 - 3,844 Management fee 3 (999) (999) (1,998) (857) (857) (1,714) Other expenses 4 (422) - (422) (315) - (315) Movement in fair value 15 - 371 371 - (479) (479) of derivative financial instruments Net return before 2,950 19,724 22,674 2,672 31,238 33,910 finance costs and taxation Interest payable and 6 (325) (325) (650) (322) (322) (644) similar charges Net return before 2,625 19,399 22,024 2,350 30,916 33,266 taxation Taxation 7 - - - - - - Net return after 2,625 19,399 22,024 2,350 30,916 33,266 taxation Return per Ordinary 9 7.84p 57.95p 65.79p 7.02p 92.35p 99.37p share The total column of this statement is the profit and loss account of the Company. All revenue and capital items in the above statement derive from continuing operations. No Statement of Total Recognised Gains and Losses has been prepared as all such gains and losses are shown in the Income Statement. No operations were acquired or discontinued in the year. The notes below form part of these financial statements. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS for the year to 31 March 2014 Called-up Share Capital Distributable Total equity share premium redemption Special Capital revenue shareholders' capital account reserve reserve reserve reserve funds Year to 31 Notes Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 March 2014 As at 31 3,348 19,307 1,362 4,642 144,259 4,233 177,151 March 2013 Fair value 10 - - - - 20,352 - 20,352 movement of investments Costs - - - - (1,324) - (1,324) allocated to capital Dividends 8 - - - - - (2,263) (2,263) paid in the year Movement in 15 - - - - 371 - 371 fair value of derivative financial instruments Net revenue - - - - - 2,625 2,625 for the year As at 31 3,348 19,307 1,362 4,642 163,658 4,595 196,912 March 2014 Called-up Share Capital Distributable Total equity share premium redemption Special Capital revenue shareholders' capital account reserve reserve reserve reserve funds Year to 31 Notes Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 March 2013 As at 31 3,348 19,307 1,362 4,642 113,343 4,146 146,148 March 2012 Fair value 10 - - - - 32,574 - 32,574 movement of investments Costs - - - - (1,179) - (1,179) allocated to capital Dividends 8 - - - - - (2,263) (2,263) paid in the year Movement in 15 - - - - (479) - (479) fair value of derivative financial instruments Net revenue - - - - - 2,350 2,350 for the year As at 31 3,348 19,307 1,362 4,642 144,259 4,233 177,151 March 2013 The notes below form part of these financial statements. BALANCE SHEET as at 31 March 2014 31 March 2014 31 March 2013 Notes Â£'000 Â£'000 Â£'000 Â£'000 Fixed assets Investments designated at fair 10 209,411 179,446 value through profit or loss Current assets Debtors 12 1,070 711 Cash at bank 21 2,137 12,961 3,207 13,672 Creditors: amounts falling due within one year Other creditors 13 (523) (413) Revolving credit facility 14 (15,000) (15,000) (15,523) (15,413) Net current liabilities (12,316) (1,741) Total assets less current 197,095 177,705 liabilities Creditors: amounts falling due 15 after more than one year Interest rate swap (183) (554) Net assets 196,912 177,151 Share capital and reserves Called-up share capital 16 3,348 3,348 Share premium account 19,307 19,307 Capital redemption reserve 1,362 1,362 Special reserve 4,642 4,642 Capital reserve 163,658 144,259 Distributable revenue reserve 4,595 4,233 Total equity shareholders' funds 196,912 177,151 Net asset value per Ordinary 19 588.22p 529.19p share These financial statements were approved by the Board of Directors on 23 June 2014. KATHRYN MATTHEWS Chairman Company Registered Number: 3004101 The notes below form part of these financial statements. STATEMENT OF CASH FLOWS for the year to 31 March 2014 Year to Year to 31 March 2014 31 March 2013 Notes Â£'000 Â£'000 Â£'000 Â£'000 Operating activities Investment income received 4,604 3,681 Deposit interest received 3 2 Management fees paid (1,900) (1,688) Performance fees paid - (812) Company secretarial fees paid (109) (82) Other cash expenses (314) (227) Net cash inflow from operating 20 2,284 874 activities Servicing of finance Interest and similar charges (645) (646) paid Net cash outflow from servicing (645) (646) of finance Capital expenditure and financial investment Purchases of investments (108,868) (28,187) Sales of investments 98,668 29,217 Net cash (outflow)/inflow from (10,200) 1,030 investing activities Equity dividends paid (2,263) (2,263) Decrease in cash 21 (10,824) (1,005) The notes below form part of these financial statements. NOTES TO THE FINANCIAL STATEMENTS at 31 March 2014 1 Accounting Policies Accounting Convention The financial statements are prepared on a going concern basis, under the historical cost convention as modified by the revaluation of fixed asset investments and in accordance with UK applicable accounting standards and the Statement of Recommended Practice regarding the Financial Statements of Investment Trust Companies and Venture Capital Trusts ("SORP") issued in January 2009. The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied throughout the year and the preceding year. Income Recognition Dividend income is included in the financial statements when the investments concerned are quoted ex-dividend and shown net of any associated tax credit where applicable. Deposit interest and underwriting commissions receivable are included on an accruals basis. Management Expenses and Finance Costs All expenses are accounted for on an accruals basis. Management fees and finance costs are allocated 50% to the capital reserve and 50% to the revenue account. This is in line with the Board's expectations of long-term returns from the investment portfolio of the Company. Performance fees are charged 100% to capital. Costs arising on early settlement of debt are allocated 100% to capital, in accordance with the requirements of the SORP. All other expenses are allocated in full to the revenue account. Investments Investments are recognised and derecognised on the trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned, and are initially measured at fair value. All investments held by the Company are classified as at "fair value through profit or loss". Investments are initially recognised at cost, being the fair value of the consideration given. After initial recognition investments are measured at fair value, with unrealised gains and losses on investments and impairment of investments recognised in the Income Statement and allocated to capital. For investments actively traded in organised financial markets, fair value is generally determined by reference to quoted market bid prices or closing prices for SETS (London Stock Exchange's electronic trading service) stocks sourced from the London Stock Exchange on the Balance Sheet date, without adjustment for transaction costs necessary to realise the asset. Treasury Shares The consideration paid for shares held in Treasury is presented as a deduction from equity shareholders' funds, in accordance with FRS 25: "Financial Instruments: Disclosure and Presentation". Any profit on the sale of shares out of Treasury is credited to the share premium account in full. Taxation The charge for taxation is based on the net revenue for the year. Deferred taxation is provided in accordance with FRS 19: "Deferred Taxation", on all timing differences that have originated but not reversed by the Balance Sheet date. Deferred taxation assets are only being recognised to the extent that they are regarded as recoverable. Dividends Payable to Shareholders In accordance with FRS 21: "Events after the Balance Sheet date", dividends to shareholders are recognised as a liability in the period in which they have been declared. Therefore, any interim dividends are not accounted for until paid, and final dividends are accounted for when approved by shareholders at an Annual General Meeting. Bank loans and borrowings All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest bearing loans and borrowings are subsequently measured at amortised cost. Any differences between cost and redemption value is recognised in the Income Statement over the period of the borrowings on an effective interest basis. DERIVATIVE FINANCIAL INSTRUMENTS It is the Company's policy not to trade in derivative financial instruments. However, the Company has utilised an interest rate swap to mitigate its exposure to interest rate changes on its bank loan which is subject to a variable rate of interest. Details can be found in note 15. Derivatives are recognised at fair value. Movement in the fair value of the derivative is recognised in the Income Statement and allocated to capital. RESERVES Capital reserve The following are accounted for in this reserve: â€¢ gains and losses on the realisation of investments; â€¢ net movement arising from changes in the fair value of investments that can be readily converted to cash without accepting adverse terms; â€¢ net movement from changes in the fair value of derivative financial instruments; and â€¢ expenses, together with related taxation effect, charged to this account in accordance with the above policies. Special reserve The special reserve was created by a reduction in the share premium account by order of the High Court in August 1998. It can be used for the repurchase of the Company's Ordinary shares. In accordance with the SORP, the consideration paid for shares bought into and held in Treasury is shown as a deduction from the special reserve. Capital redemption reserve The capital redemption reserve accounts for amounts by which the issued capital is diminished through the repurchase of the Company's own shares. 2 Income Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Income from investments 4,368 3,842 UK dividend income 4,295 3,781 Overseas dividend income 73 61 Other income Bank interest 3 2 Total income 4,371 3,844 Total income comprises Dividends from financial assets designated 4,368 3,842 at fair value through profit or loss Interest from financial assets designated 3 2 at fair value through profit or loss Dividends and interest 4,371 3,844 3 Management Fee Year to 31 March 2014 Year to 31 March 2013 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Management fee 999 999 1,998 857 857 1,714 Performance fee - - - - - - The Manager received a monthly fee equivalent to 1/12 of 1.0% of the gross assets of the Company valued at the close of business on the last business day of each month and is entitled to a performance fee calculated as described in the Directors' Report in the full Annual Report and Accounts. At 31 March 2014, Â£259,000 (2013: Â£161,000) was due for payment to the Manager. 4 Other Expenses Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Administration and company 103 89 secretarial fees Auditor's remuneration for: - audit 20 20 Other expenses (including Directors' 299 206 remuneration and VAT) 422 315 5 Directors' Remuneration Year to Year to 31 March 2014 31 March 2013 Â£'000 Â£'000 Total fees 88 85 A breakdown of the Directors' remuneration is set out in the Directors' Remuneration Report in the full Annual Report and Accounts. The Company has no employees. 6 Interest Payable and Similar Charges Year to 31 March 2014 Year to 31 March 2013 Revenue Capital Total Revenue Capital Total Financial Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 liabilities not at fair value through profit or loss Interest payable on 322 322 644 322 322 644 loan Loan commitment fee 3 3 6 - - - 325 325 650 322 322 644 7 Taxation Year to 31 March 2014 Year to 31 March 2013 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Return on ordinary 2,625 19,399 22,024 2,350 30,916 33,266 activities before taxation Theoretical 604 4,462 5,066 564 7,420 7,984 corporation tax at 23% (2013: 24%) Effects of: - capital gains - (4,766) (4,766) - (7,703) (7,703) that are not taxable - overseas (17) - (17) (15) - (15) dividend income not liable to corporation tax - UK dividend (957) - (957) (883) - (883) income not liable to corporation tax - excess 370 304 674 334 283 617 management expenses - - - - - - At 31 March 2014, the Company had surplus management expenses and non-trade losses of Â£33,109,133 (2013: Â£30,175,753) which have not been recognised as a deferred taxation asset. This is because the Company is not expected to generate taxable income in future periods in excess of the deductible expenses of those future periods and, accordingly, it is unlikely that the Company will be able to reduce future taxation through the use of existing surplus expenses. Due to the Company's status as an investment trust and the intention to continue to meet the conditions required to maintain its investment trust status, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments. 8 Dividends Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Paid 2013 Final dividend of 6.76p (2012: 2,263 2,263 6.76p) per Ordinary share Proposed 2014 Final dividend of 7.50p (2013: 2,511 2,263 6.76p) per Ordinary share 9 Return per Ordinary Share Year to 31 March 2014 Year to 31 March 2013 Revenue Capital Total Revenue Capital Total Ordinary 7.84p 57.95p 65.79p 7.02p 92.35p 99.37p share Revenue return per Ordinary share is based on the net revenue after taxation of Â£2,625,000 (2013: Â£2,350,000) and 33,475,958 (2013: 33,475,958) Ordinary shares, being the weighted average number of Ordinary shares, excluding any shares held in Treasury. Capital return per Ordinary share is based on net capital gains for the year of Â£19,399,000 (2013: Â£30,916,000), and on 33,475,958 (2013: 33,475,958) Ordinary shares, being the weighted average number of Ordinary shares, excluding any shares held in Treasury. Normal and diluted return per share are the same as there are no dilutive elements on share capital. 10 Investments Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Total investments at 209,411 179,446 fair value The investment portfolio comprises 54 listed UK equity holdings. No holdings are traded on AIM. Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Opening book cost 110,462 103,944 Opening investment 68,984 44,429 holding gains Opening valuation 179,446 148,373 Movements in the year Purchases at cost 108,868 27,716 Sales - proceeds (99,255) (29,217) Sales - realised 32,800 8,019 gains on sales (Decrease)/increase (12,448) 24,555 in investment holding gains Closing valuation 209,411 179,446 Closing book cost 152,875 110,462 Closing investment 56,536 68,984 holding gains 209,411 179,446 Fair Value Hierarchy In accordance with FRS 29: "Financial Instruments: Disclosures", the Company must disclose the fair value hierarchy of financial instruments. The fair value hierarchy consists of the following three levels: â— level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities; â— level 2 - inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and â— level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs). For financial instruments (within the scope of FRS 29), which are measured at fair value in the Balance Sheet, an entity shall disclose the following for each class of financial instruments: â— the level in the fair value hierarchy into which the fair value measurements are categorised in their entirety; â— any significant transfers between level 1 and level 2 of the fair value hierarchy and the reasons for those transfers; and â— for fair value measurements in level 3 of the hierarchy, a reconciliation from the opening balances to the closing balances. As well as highlighting purchases, sales, and gains and losses, this reconciliation will identify transfers into or out of level 3 and the reasons for those transfers. The table below sets out fair value measurements of financial assets in accordance with the FRS 29 fair value hierarchy system: 31 March 2014 31 March 2013 Level 1 Level 2 Total Level 1 Level 2 Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Equity investments 209,411 - 209,411 179,446 - 179,446 209,411 - 209,411 179,446 - 179,446 The table below sets out fair value measurements of financial liabilities in accordance with the FRS 29 fair value hierarchy system: 31 March 2014 31 March 2013 Level 1 Level 2 Total Level 1 Level 2 Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Revolving Credit Loan - 15,000 15,000 - 15,000 15,000 Facility Derivative financial - 183 183 - 554 554 instruments - 15,183 15,183 - 15,554 15,554 Details of the Revolving Credit Loan Facility are provided in note 14. There were no level 3 investments. TRANSACTION COSTS During the year, the Company incurred transaction costs of Â£617,000 (2013: Â£172,000) and Â£92,000 (2013: Â£33,000) on purchases and sales of investments, respectively. These amounts are deducted in determining gains on investments at fair value as disclosed in the Income Statement. Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Net gains on investments at fair value through profit or loss Gains on sales 32,800 8,019 Changes in fair value (12,448) 24,555 20,352 32,574 A list of the investments by market value and an analysis of the investment portfolio by industrial or commercial sector are set out above. 11 Significant Holdings The Company has no holdings of 3% or more of the voting rights attached to shares that is material in the context of the financial statements. 12 Debtors Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Prepayments and accrued 76 68 income Due from brokers 587 - Dividends receivable 407 643 1,070 711 The carrying amount for prepayments, accrued income and dividends receivable disclosed above reasonably approximates to its fair value at the year end and is expected to be realised within a year from the Balance Sheet date. 13 Other Creditors Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Accruals 523 413 523 413 The carrying amount for accruals disclosed above reasonably approximates to its fair value at the year end and is expected to be paid within a year from the Balance Sheet date. 14 Revolving Credit Loan Facility Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Falling due within one year 15,000 15,000 15,000 15,000 On 19 December 2011, the Company agreed a Â£15,000,000 Floating Rate Revolving Credit Loan Facility with ING Bank N.V. At the same time the Company entered into a Â£15,000,000 Interest Rate Swap with ING Bank N.V. This facility is available for a five-year term from 19 December 2011 to 19 December 2016. The loan has been drawn down until 19 December 2014 and will be rolled over on a six monthly basis. Interest is payable at six month LIBOR plus a margin and mandatory costs. The Interest Rate Swap is for five years and enables the Company to fix the effective interest rate of the Â£15,000,000 loan over its term at 4.2921%* per annum. On 10 February 2014, the Company agreed an additional Â£10,000,000 Floating Rate Revolving Credit Loan Facility with ING Bank N.V. This facility is available for a three-year term from 24 February 2014 to 24 February 2017. At 31 March 2014, no amounts had been drawn down on this facility. Interest is payable on each advance at LIBOR plus a margin and mandatory costs. A commitment fee is payable at the rate of 0.4% if the average utilisation is less than 50% of the facility during the quarter or 0.35% if the average utilisation is 50% or more of the facility during the quarter. * Including margin and mandatory costs. 15 Derivative Financial Instruments An interest rate swap is an agreement between two parties to exchange fixed and floating rate interest payments based upon interest rates defined in the contract without the exchange of the underlying principal amounts. The Company entered into an agreement on 19 December 2011 which swapped its obligation to pay variable rates of interest on its Â£15,000,000 facility for a fixed rate of 4.2921% per annum until 19 December 2016. The fair value of the derivative financial instrument is shown below: Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Opening valuation (554) (75) Movement in fair value 371 (479) Closing valuation (183) (554) 16 Share Capital 31 March 31 March 2014 2013 Â£'000 Â£'000 Allotted, called-up and fully paid: 33,475,958 (2013: 33,475,958) Ordinary 3,348 3,348 shares of 10p each Voting rights Ordinary shareholders have unrestricted voting rights at all general meetings of the Company. At the Annual General Meeting on 26 July 2013 the Company was granted the authority to purchase 5,018,046 Ordinary shares. This authority is due to expire at the conclusion of the next Annual General Meeting. During the year no shares were purchased for cancellation. The Company does not have any externally imposed capital requirements. The capital of the Company is managed in accordance with its Investment Policy in pursuit of its investment objective, both of which are detailed above. 17 Duration of the Company The Articles of Association prescribe that shareholders should have the opportunity to consider the future of the Company at regular intervals. At the Annual General Meeting held on 26 July 2013, shareholders voted to remove the obligation to convene a General Meeting during 2014 for the purpose of voluntarily winding up the Company, as provided for in the Company's Articles of Association. The Company will be required to propose a resolution at a General Meeting every five years thereafter, unless at any Annual General Meeting held within, and not more than,18 months prior to the expiry of the relevant period of five years, an Ordinary Resolution is passed releasing the Directors from the obligation to convene such a General Meeting. 18 Own Shares Held in Treasury The Company has previously taken advantage of the regulations which came into force on 1 December 2003 to allow companies, including investment trusts, to buy their own shares and hold them in Treasury for re-issue at a later date. There were no shares held in Treasury at any time during the year. 19 Net Asset Value per Ordinary Share Net asset value per Ordinary share is based on net assets of Â£196,912,000 (2013: Â£177,151,000) and on 33,475,958 (2013: 33,475,958) Ordinary shares, being the number of Ordinary shares in issue at the year end. 20 Reconciliation of Net Revenue Before Finance Costs and Taxation to Net Cash Inflow from Operating Activities Year to Year to 31 March 31 March 2014 2013 Â£'000 Â£'000 Net revenue before finance costs 2,950 2,672 and taxation Management fee charged to (999) (857) capital Increase/(decrease) in 105 (796) creditors Decrease/(increase) in prepayments 228 (145) and accrued income Net cash inflow from operating 2,284 874 activities 21 Reconciliation of Net Cash Flows to Movements in Net Debt Year to Year to 31 March 2014 31 March 2013 Â£'000 Â£'000 Decrease in cash in (10,824) (1,005) year Movement in net funds (10,824) (1,005) Net debt at beginning (2,039) (1,034) of year Net debt at end of year (12,863) (2,039) ANALYSIS OF NET DEBT 1 April Cash 31 March 2013 flows 2014 Â£'000 Â£'000 Â£'000 Cash at bank 12,961 (10,824) 2,137 Debt due in less than (15,000) - (15,000) one year (2,039) (10,824) (12,863) 22 Analysis of Financial Assets and Liabilities As required by FRS 29: "Financial Instruments: Disclosures", an analysis of financial assets and liabilities, which identifies the risk to the Company of holding such items, is given below. BACKGROUND The Company's financial instruments comprise securities, cash balances and debtors and creditors that arise from its operations, for example, in respect of sales and purchases awaiting settlement and debtors for accrued income. The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period. The Company has little or no exposure to cash flow or foreign currency risk. The principal risks the Company faces in its portfolio management activities are: â— credit risk; â— market price risk, i.e. movements in the value of investment holdings caused by factors other than interest rate or currency movement; â— interest rate risk; â— liquidity risk, i.e. the risk that the Company has difficulty in realising assets or otherwise raising funds to meet commitments associated with financial instruments; and â— gearing. The Manager monitors the financial risks affecting the Company on a daily basis. The Directors receive financial information on a monthly basis which is used to identify and monitor risk. (i) Credit Risk Credit risk is the risk of financial loss to the Company if the contractual party to a financial instrument fails to meet its contractual obligations. The carrying amounts of financial assets best represent the maximum credit risk exposure at the Balance Sheet date. The Company's listed investments are held on its behalf by HSBC acting as agent, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Board monitors the Company's risk by reviewing the custodian's internal controls reports. Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered in its obligations before any transfer of cash or securities away from the Company is completed. The banks at which cash is held are under constant review. The maximum exposure to credit risk at 31 March 2014 was: 31 March 2014 31 March 2013 Â£'000 Â£'000 Cash at bank 2,137 12,961 Debtors and 1,070 711 prepayments 3,207 13,672 None of the Company's assets are past due or impaired. (ii) Market Price Risk Market price risk arises mainly from uncertainty about future prices of financial instruments. The value of shares and the income from them may fall as well as rise and shareholders may not get back the full amount invested. The Manager continues to monitor the prices of financial instruments held by the Company on a real time basis. Adherence to the Company's Investment Policy shown above mitigates the risk of excessive exposure to one issuer or sector. The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Manager. The Board meets regularly and at each meeting reviews the investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and Investment Policy. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore the portfolio may well diverge from the short-term fluctuations of the benchmark. Fixed asset investments are valued at fair value as detailed in note 1. A list of the Company's equity investments, an analysis of the investment portfolio by broad industrial and commercial sector, an analysis of the portfolio by market capitalisation of holdings and a description of the 10 largest equity investments are set out above. The maximum exposure to market price risk is the fair value of investments of Â£209,411,000 (2013: Â£179,446,000). If the investment portfolio valuation fell by 1% from the amount detailed in the financial statements as at 31 March 2014 it would have the effect, with all other variables held constant, of reducing the net capital return before taxation by Â£2,094,000 (2013: Â£1,794,000). An increase of 1% in the investment portfolio valuation would have an equal and opposite effect on the net capital return before taxation. (iii) Interest Rate Risk Changes in interest rates may cause fluctuations in the income and expenses of the Company. The Revolving Credit Loan Facilities with ING Bank N.V. are floating rate facilities (see note 14). The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board. The Company mitigates the risk by the use of an interest rate swap to fix the interest rate on Â£15,000,000 of its borrowings. The Company received interest on cash deposits over Â£25,000 at a rate of 0.03%. The interest received in the year amounted to Â£3,000 (2013: Â£2,000). The interest rate risk profile of the Company is given below. If interest rates had reduced by 1% from those paid as at 31 March 2014 it would have the effect, with all other variables held constant, of increasing the net revenue return before taxation on an annualised basis by Â£150,000 (2013: Â£150,000). If there was an increase in interest rates of 1%, the net revenue return before taxation on an annualised basis would have decreased by Â£129,000 (2013: Â£20,000). The calculations are based on cash at bank, short-term deposits and the Revolving Credit Loan Facilities as at 31 March 2014 and these may not be representative of the year as a whole. Due to the structure of the loan facilities, changes in interest rates would not have an effect on the fair value of the loans. (iv) Liquidity Risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Manager does not invest in unlisted securities on behalf of the Company. However, the investments held by the Company consist of UK quoted small companies which are inherently less liquid than quoted large companies. The Manager reviews the portfolio liquidity on a regular basis. Short-term flexibility is achieved through the use of bank borrowings. Liquidity risk is mitigated by the fact that the Company has Â£3.2 million cash at bank and short-term debtors which can satisfy its creditors and that as a closed end fund assets do not need to be liquidated to meet redemptions. (v) Gearing Gearing can have amplified effects on the net asset value of the Company. It can have a positive or negative effect depending on market conditions. It is the Company's policy to determine the adequate level of gearing appropriate to its own risk profile. (vi) Use of Derivatives It is the Company's policy not to trade in derivative financial instruments. However, the Company has utilised an interest rate swap to mitigate its exposure to interest rate changes on its Â£15,000,000 Revolving Credit Loan Facility. FINANCIAL ASSETS The Company's financial assets consist of listed equity shares, which neither pay interest nor have a maturity date, cash at bank and short-term debtors. No fixed interest assets were held at 31 March 2014 nor during the year. All financial assets are in sterling and disclosed at fair value through profit or loss. FINANCIAL LIABILITIES The Company finances its operations through equity, retained profits and bank borrowings (see note 14). The change in the fair value of financial liabilities during the year was not related to the credit risk profile. The interest rate risk profile of the financial liabilities of the Company as at 31 March 2014 is as follows: Weighted average Period interest until Total rate maturity Â£'000 % Years Amounts drawn down under Revolving 15,000 3.22 0.22 Credit Loan Facilities Derivative financial instruments 183 1.07 2.72 Financial liabilities upon which 523 - - no interest is paid The interest rate risk profile of the financial liabilities of the Company as at 31 March 2013 was as follows: Weighted average Period interest until Total rate maturity Â£'000 % Years Amounts drawn down under 15,000 3.69 0.22 Revolving Credit Loan Facility Derivative financial instruments 554 0.60 3.72 Financial liabilities upon which 413 - - no interest is paid The maturity profile of the Company's financial liabilities is as follows: 31 March 31 March 2014 2013 Â£'000 Â£'000 In one year or 15,523 15,413 less In more than one year but not more than two - - years In more than two years but not more than 183 554 five years 15,706 15,967 The Company had nil undrawn under the floating rate Revolving Credit Loan Facility at 31 March 2014 (2013: nil). The Company had Â£10,000,000 undrawn under the floating rate Revolving Credit Loan Facility at 31 March 2014 (2013: nil). The Company's Revolving Credit Loan Facilities are measured at cost and denominated in sterling. All other financial liabilities are in sterling and disclosed at fair value. It is considered that, because of the short-term nature of the facilities, cost approximates to fair value. 23 Capital Management Policies The objective of the Company is to achieve capital appreciation through investing in small quoted companies listed on the London Stock Exchange or traded on AIM and to achieve relative outperformance of its benchmark, the NSCI. No unquoted investments are permitted. In pursuing this long-term objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern. It must therefore maintain an optimal capital structure through varying market conditions. This involves the ability to: issue and buy back share capital within limits set by the shareholders in general meeting; borrow monies in accordance with the Articles of Association; and pay dividends to shareholders out of distributable revenue reserves. Details of the Ordinary share capital are set out in note 16. Dividend payments are set out in note 8. 31 March 2014 31 March 2013 Â£'000 Â£'000 Called-up share capital 3,348 3,348 Share premium account 19,307 19,307 Capital redemption reserve 1,362 1,362 Special reserve 4,642 4,642 Capital reserve 163,658 144,259 Distributable revenue reserve 4,595 4,233 Total equity shareholders' funds 196,912 177,151 The Company's objectives for managing capital are unchanged and have been complied with throughout the year. 24 Commitments and Contingent Liabilities At 31 March 2014, there were no capital commitments or contingent liabilities (2013: nil). 25 Related Party Transactions Under the Listing Rules the Manager is regarded as a related party of the Company. The amounts paid to the Manager are disclosed in note 3. However, the existence of an independent Board of Directors demonstrates that the Company is free to pursue its own financial and operating policies, and therefore, in terms of FRS 8: "Related Party Transactions", the Manager is not considered a related party. The relationship between the Company, its Directors and the Manager is disclosed in the Directors' Report in the full Annual Report and Accounts. COMPANY SUMMARY Investment Objective MUSCIT's investment objective is capital appreciation through investing in small quoted companies listed on the London Stock Exchange or traded on the Alternative Investment Market ("AIM") and to achieve relative outperformance of its benchmark, the Numis Smaller Companies Index (excluding Investment Companies) ("NSCI"). No unquoted investments are permitted. Investment Policy The Company seeks to achieve its objective and to diversify risk by investing in a portfolio of quoted UK smaller companies. At the time of initial investment, a potential investee company must be profitable and no bigger than the largest constituent of the NSCI, which represents the smallest 10% of the UK Stock Market by value. At the start of 2014, this was any company below Â£1.7 billion in size. The Manager focuses on the smaller end of this Index. In order to manage risk the Manager will normally limit any one holding to a maximum of 4% of the Company's investments. The portfolio weighting of each investment is closely monitored to reflect the underlying liquidity of the particular company. The Company's AIM exposure is also closely monitored by the Board and is limited to 30% of total investments with Board approval required for exposure to be above 25%. The Manager is focused on identifying high quality niche companies operating in growth markets. This typically leads the Manager to invest in companies that enjoy high barriers to entry, pricing power, a sustainable competitive advantage and strong management teams. The portfolio is therefore constructed on a "bottom up" basis and there are no sectoral constraints placed on the Manager. The Board, in consultation with the Manager, is responsible for determining the gearing strategy of the Company. Gearing is used to enhance returns when the timing is considered appropriate. The Company currently has credit facilities of Â£25 million through ING Bank of which Â£15 million was drawn as at 31 March 2014. The Board has agreed to limit borrowings to 25% of shareholders' funds. Benchmark (capital return) For the year under review the benchmark was the NSCI. Prior to 1 April 2013, the benchmark was the FTSE SmallCap. Gross Assets Â£212,618,000 as at 31 March 2014. Shareholders' Funds Â£196,912,000 as at 31 March 2014. Market Capitalisation Â£169,221,000 as at 31 March 2014. Capital Structure As at 31 March 2014 and at the date of this report, the Company had 33,475,958 Ordinary shares of 10p each in issue (of which none were held in Treasury). Wind-up Date In accordance with the Articles of Association, an Ordinary Resolution can be put to shareholders at the Annual General Meeting to be held after 30 November 2017 to release the Directors from the obligation to convene a General Meeting in 2019 for the purpose of winding up the Company. Management Fee The management fee comprises two components: a fixed fee of 1/12 of 1% of the gross assets of the Company, payable monthly in arrears, and a performance fee of 0.1% of the gross assets of the Company for each 1% outperformance (or part thereof) of the Company's NAV against the NSCI over the financial year, subject to a maximum of 0.5% of the gross assets calculated at the end of the financial year. With effect from 1 April 2014, the management fee was reduced to 0.85% of the gross assets, with no performance fee. Administration and Company Secretarial Fees Secretarial and administrative services are provided by Capita Sinclair Henderson Limited, under an agreement dated 3 November 2011. Fees for these services of Â£103,000 were paid in the year to 31 March 2014, and are subject to an annual RPI uplift. Sources of Information All information contained within the Chairman's Statement and the Manager's Report has been provided by Montanaro Asset Management Limited unless otherwise noted. Annual General Meeting The Company's Nineteenth Annual General Meeting will be held at the offices of Montanaro Asset Management Limited, 53 Threadneedle Street, London EC2R 8AR on 30 July 2014 at 12 noon. National Storage Mechanism A copy of the 2014 Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/NSM . ENDS Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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