Annual Financial Report

RNS Number : 7115Q

Montanaro UK Smlr Cos Inv Tst PLC

23 June 2020

 

MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC

(LEI: 213800UDDXXTXIF29P85)

Annual Results announcement for the year ended 31 March 2020

Highlights

For the year ended 31 March 2020

Performance

Total Returns	1 year	3 year	5 year	10 year	Since launch
Ordinary share price	(0.3%)	10.3%	26.6%	172.4%	721.9%
Net Asset Value ("NAV")1	(8.5%)	(1.4%)	14.1%	128.0%	751.9%
Benchmark (Composite)	(25.9%)	(23.0%)	(4.7%)	78.1%	n/a

Sources: Morningstar Direct, AIC, Numis, Montanaro Asset Management Limited ("Montanaro" or "the Manager").

All returns are shown with dividends reinvested.

The Benchmark is a composite index comprising the FTSE SmallCap Index (excluding investment companies) until 31 March 2013 and the NSCI from 1 April 2013 onwards.

	2020	2019	% change
For the year ended 31 March
Revenue return per Ordinary share	2.7p	2.5p	4%
Dividend per Ordinary share	5.3p	3.9p	36%
Ongoing charges2	0.81%	0.80%
Portfolio turnover3	35.6%	20.0%

As at 31 March
Ordinary share price	101.0p	106.0p	(4.7%)
NAV per Ordinary share3	113.8p	129.2p	(11.9%)
Discount to NAV2	11.2%	18.0%
Gross assets3	£210.4m	£236.2m	(11.0%)
Net assets	£190.4m	£216.2m	(11.9%)
Market capitalisation	£169.1m	£177.4m	(4.7%)
Net gearing employed3	4.2%	6.2%

1 The difference between the NAV total return and the NAV per Ordinary Share Return reflects the impact of reinvested dividends.

2 Details provided in Alternative Performance Measures section contained within the full Annual Report and Accounts.

3 Details provided in the glossary contained within the full Annual Report and Accounts.

Extracts from the Strategic Report

Chairman's Statement

Background

I am pleased to present the twenty-fifth annual report of Montanaro UK Smaller Companies Investment Trust PLC ("MUSCIT" or the "Company") for the year ended 31 March 2020.

Performance

The past year to 31 March 2020 has been difficult and volatile. The total return on net assets of MUSCIT during this period was a negative of 8.5%. Pleasingly, however, this return represented an outperformance of 17.4% relative to our benchmark, which fell 25.9%.

The Board would like to congratulate Charles Montanaro, the named Manager of the Company, on a third consecutive year of outperformance and I am delighted to confirm that he has agreed to continue managing the Company for a minimum of 5 more years.

Since inception in 1995, the Company has delivered a cumulative Net Asset Value ("NAV") total return of 752%.

Dividends

The Company's aim is to generate capital growth from its portfolio. However, in July 2018, the Board announced a new dividend policy to pay quarterly dividends equivalent to 1% of the Company's NAV on the last business day of the preceding financial quarter, being the end of March, June, September and December.

During the Financial Year, the Company paid four quarterly dividends amounting to a total of 5.31p, equivalent to 5% of the share price at the start of the year.

We are pleased that MUSCIT remains the highest yielding UK SmallCap investment trust in the market.

The Board has given careful consideration to its dividend policy in light of the financial and economic challenges posed by the Coronavirus ("Covid-19) outbreak. Fortunately, the Company is well capitalised; has not entered into any derivatives contracts; and has over £20 million of cash and undrawn borrowing facilities available. Therefore, the Board is pleased to confirm no change to the current policy of paying quarterly dividends equivalent to 1% of NAV.

Discount

Over the last financial year the discount of MUSCIT's share price to NAV, as shown in the graph on page 3 within the full Annual Report and Accounts, narrowed from 18% to 11%. There has been a major effort on the part of the Manager to encourage retail flows into the Company and this does appear to be bearing fruit with platforms making up an ever increasing percentage of the share register.

Share Buy Backs

The Board is responsible for the implementation of share buy-backs which are undertaken at arms' length from Montanaro. No shares were bought back during the year.

Board

The Board consists solely of independent Non-Executive Directors with a good balance of skills, experience, diversity and knowledge of the Company and its business.

On behalf of the Board, I would like to extend my thanks to our former Chairman, Roger Cuming, who chaired the Board from July 2016 until July 2019 and served as a Director since 2009. Roger's outstanding contribution and wise counsel to the Board will be a hard act to follow.

I would also like to thank Kate Bolsover who stepped down from the Board in November 2019 due to other commitments. Kate made a significant contribution to the Company during her five year tenure and her enthusiasm and industry knowledge will be missed.

We are fortunate to have welcomed Catriona Hoare to the Board in November 2019. Catriona has extensive experience of and expertise in investment management and she is already making an important contribution to Board discussions.

Each year, the Directors go through a rigorous appraisal of the Board and its Committees and assess how best it can function. A committed, experienced, three-person Board with the appropriate  breadth of skills seems to work well for MUSCIT.

Company Secretary

On 1 October 2019, the Board appointed Link Company Matters Limited as Company Secretary in place of Maitland Administration Services Limited. At the same time, the Company's registered office address changed to 65 Gresham Street, London EC2V 7NQ.

AGM
At the time of publication of this document, the UK Government has prohibited large public gatherings, save in certain limited circumstances. In light of these measures and in order to protect the health and safety of the Company's shareholders and Directors, the AGM, which is scheduled to be held at 11am on Friday 31 July 2020, will be conducted as a closed meeting and will be held to complete the formal business only. To allow shareholders the opportunity to engage with the Board and the Manager, shareholders are invited to submit in writing any questions they wish to ask to the Company Secretary at [e-mail].  Questions which are submitted no later than noon on 27 July 2020 will be answered on the Company's website  www.montanaro.co.uk/trust/muscit  prior to the close of proxy voting. Any questions submitted after this deadline will be responded to in due course.

Coronavirus Pandemic

Since the end of February 2020, global financial markets have seen immense disruption due to the rapid spread of Covid-19. However, all the Company's service providers have enacted their respective business continuity plans and continue to operate normally. The advantages of the closed end structure of investment trusts become ever more evident during these times of such extreme stock market volatility.

Outlook

The first quarter of 2020 was one of the worst periods of market performance in living memory. The Numis Smaller Companies Index (excluding investment companies) ("NSCI") recorded its second largest quarterly decline (-26%) in more  than 30 years, resulting in the 8-year cycle-adjusted Price-to-Earnings ratio of the index falling to a 10-year low of 13.5x.

During this difficult period, the Montanaro team have continued to have an active dialogue with our investee companies in order to assess the impact that the collapse in global economic activity has been having on them. In particular, they have been looking closely at balance sheet risk and  companies' access to credit. In times like these, the Manager's unwavering emphasis on investing in high quality businesses with strong balance sheets comes into its own. Such companies have a much higher likelihood of surviving this crisis and should emerge from it all the stronger.

We expect one consequence of this global health crisis will be a greater investor focus on the Environmental, Social and Governance ("ESG") credentials of investment funds in the years to come. This has long been one of the strengths of the Montanaro investment process in which ESG has been integrated for many years. Many of you will have noticed that Montanaro has recently started to report on the carbon, water and waste footprint of the Company's investments. Together with MUSCIT's aggregate ESG score, this additional disclosure will allow our investors to gauge the results of Montanaro's constructive engagement with our investee companies.

As MUSCIT celebrates its first 25 years, I would like to thank our investors for their past and future support. This difficult period will one day come to an end. Until then, on behalf of the Board and Montanaro, I would like to send all our investors and their loved ones our very best wishes for the future.

ARTHUR COPPLE

Chairman

22 June 2020

Manger's Report

The Attractions of Quoted UK Small Companies ('SmallCap')

The key attraction of investing in smaller companies is their long term record of delivering higher returns to investors than large companies. In the UK, over the last 65 years, this has amounted to an average of 3.3% per annum ("the SmallCap Effect"). £1 invested in UK large companies in 1954 would now be worth £1,176, whereas the same £1 invested in smaller companies would now be worth over £7,800 - over 6 times more.

The market for UK small companies is inefficient. While some large companies are analysed by more than 50 brokers, many smaller companies have little or no such coverage. We believe that this makes it easier for those with a high level of internal resources to identify attractive, undervalued and unrecognised investment opportunities. This in turn makes it possible to deliver long-term performance over and above that of the benchmark.

Montanaro

Montanaro was established in 1991.  We have one of the largest and most experienced specialist teams in the UK dedicated exclusively to researching and investing in quoted small companies. Our team of 30 includes ten nationalities, which gives us the breadth and scope to conduct thorough in-house research.

At 31 March 2020, we were looking after over £2 billion of assets.

Investment Philosophy and Approach

We specialise in researching and investing in quoted small companies.

We have a disciplined, two-stage investment process. Firstly, we identify "good businesses" within our investable universe. In the second stage, we determine the intrinsic value of each company to ensure they will make a "good investment" (the two are not always the same). When we consider that we have identified a good company, it must pass our stringent quality and ESG Checklists and be approved by our Investment Committee before it can be added to our "approved list". ESG has been integrated into or within our disciplined investment process for many years. Only the most attractive companies make it on to our approved list and it is from these that we construct your portfolio.

We have an in-house team of ten (soon to be eleven) analysts who are sector specialists. This is one of the largest such specialist teams in the country. Utilising their industry knowledge and a range of proprietary screens, they are continually searching for new ideas. With around 2,000 companies to choose from, we are spoiled for choice.

We look for high-quality companies in markets that are growing. They must be profitable; have good and experienced management; deliver sustainably high returns on capital employed; enjoy high and ideally growing profit margins reflecting pricing power and a strong market position; and provide goods and services that are in demand and likely to remain so.

We prefer companies that can deliver self-funded organic growth and remain focused on their core areas of expertise, rather than businesses that spend a lot of time on acquisitions.

Conversely, we avoid those with stretched balance sheets; poor free cash flow generation; incomprehensible or heavily adjusted accounts; unproven or unreliable management; or that face structurally challenged business models with stiff competition.

We believe that a deep understanding of a company's business model and the way it is managed are essential. Therefore, we visit our investee companies on a regular basis. These visits are important: we meet employees who have not met investors before; gain a better insight into the products and services provided; and observe and come to appreciate the culture of the company that is hard to glean from reading an annual report. Few of our peers have the in-house resources to conduct such thorough due diligence. Although hard work, these site visits are a way for us to add value and this helps us to predict where a company will be in 5-10 years. We are long-term investors.

Management's past track record is examined in detail as we seek to understand their goals and aspirations. In smaller companies, the decisions of the entrepreneurial management can make or break a company (which is why meeting them is so important). We look closely at the Board structure; the level of insider ownership; and examine remuneration and corporate governance policies.

Once a company has been added to the portfolio, our analysts conduct ongoing analysis. We will sell a holding if we believe that the company's underlying quality is deteriorating or if there has been a fundamental change to the investment case or management. We will sometimes get things wrong.

In summary, we invest in well managed, high quality, growing companies bought at sensible valuations. We keep turnover and transaction costs low and follow our companies closely over many years. We would rather pay more for a higher quality, more predictable company that can be valued with greater certainty. Finally, we align ourselves with our investors by investing meaningful amounts of our own money alongside yours. We are significant shareholders in MUSCIT.

The new dividend policy announced in July 2018 has had no impact whatsoever on the investment philosophy, process or strategy. This does not and will not change. MUSCIT is a "quality growth" Trust looking for capital growth by investing in the best managed, quoted small companies in the UK.

Environmental, Social and Governance

Montanaro became a B Corporation in June 2019. "B Corps" are businesses that meet the highest standard of verified social and environmental performance, public transparency and legal accountability to balance profit and purpose.

As part of our due diligence work, we place a great deal of emphasis on ethical and ESG factors. We work closely with our companies to encourage sustainable business practices, which we believe play an integral part in the creation of long-term shareholder value.

Montanaro believes there is a clear correlation between how well a business fares on ESG grounds and the value it creates for its shareholders. Therefore, ESG considerations form an integral part of our assessment of  a company's quality" and are fully integrated into our investment process. All the ESG research is done in-house by our Analysts.

In addition, we engage with companies in an effort to improve corporate behaviour. As responsible shareholders, we believe that it is our duty to engage with our investee companies. In our  experience, active and constructive engagement can help to foster positive long-term change in the way businesses are run.

We do not invest in companies that generate a significant proportion of sales from products with  negative societal impact such as tobacco, gambling, armaments, alcohol, high-interest-rate lending and fossil fuels. Similarly, we do not invest in companies that conduct  animal testing, unless it is required by law for healthcare purposes. With the "sustainability" trend a growing feature of the investment landscape, we believe that we are ahead of the curve. In SmallCap, it is particularly  important to engage with companies to influence the impact they have on the world. Our high level of in-house resources makes this possible.

How to invest

We have invested a great deal of time to make MUSCIT readily available to all investors. We have continued to grow our presence across the UK's investment platforms and are delighted to see a steady increase, year after year, in MUSCIT's retail following.

Together with the Board, we have appointed Marten & Co to provide sponsored research - you can find the initiation report published in March 2020 here: https://montanaro.co.uk/montanaro-uk-smaller-companies-reputation-restored/

For further details about how to invest, please refer to the website: www.montanaro.co.uk/trust/muscit

The Portfolio

At 31 March 2020, the portfolio consisted of 49 companies of which the top ten holdings represented 36%. MUSCIT held 20 companies traded on AIM, representing 34% of the portfolio by value.

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 and upside are perceived to be.

Performance

The NAV declined by 8.5% on a total return basis, which compares to a decline of 25.9% for the benchmark. This represents an outperformance of 17.4%. Over the past three years the Company has outperformed by 21.6%.

Review

As we write these lines, holed up at home for countless weeks waiting for the Covid-19 pandemic to pass, it is easy to forget that the global economy only came to a halt in the final month of MUSCIT's financial year. For most of the year, life was "normal" and equity markets were moving higher. Capital cities around the world were bustling, borders and restaurants were open, carbon emissions were on the rise and our skies were littered with airplanes.

In fact, much did happen before the pandemic hit: the Woodford debacle rocked the funds industry and served as a reminder to us all that complacency is a fund manager's worst enemy and the importance of the right fund structure for illiquid investments; Boris Johnson took over from Theresa May as Prime Minister; a General Election was held and the Brexit Withdrawal Agreement was finally passed by Parliament, putting an end to more than three years of nerve grating negotiations with Brussels and domestic political drama. Much of the political uncertainty that had prevailed since the Brexit Referendum of 2016 had been lifted by the turn of the year.

UK equity markets cheered the good news - by the end of December 2019, MUSCIT had returned 23% in NAV terms (with dividends reinvested) and 43% in share price terms since the start of the Financial Year (1 April 2019). In addition, three portfolio companies received takeover bids: Entertainment One (26% premium), Charles Taylor (34% premium) and Consort Medical (39% premium).

The bull market came to an abrupt end in February 2020 shortly before a third of humanity went into lockdown. In early March, we witnessed one of the fastest stock market sell-offs in history as the world economy collapsed. Questions rapidly emerged about companies' liquidity and solvency. Fortunately, our "quality growth" style served us well once again and the Company managed to outperform by 10% in the final quarter.

Gearing

The Alternative Investment Fund Manager ("AIFM"), in consultation with the Board, is responsible for determining the net gearing level of the Company. Net gearing remained below the 10% mark through the first half of the year and was subsequently raised to c.12% ahead of the General Election in December 2019. Fortunately, this proved to be well-timed as the UK equity market - and SmallCap in particular - rallied strongly ahead of the Christmas holiday. After a period of strong performance, we gradually reduced gearing which helped cushion the fall in markets. At 31 March 2020 net gearing employed stood at 4.2%.

Outlook

The bleak economic outlook sparked by the global response to Covid-19 mostly threatens businesses with structural weaknesses - poor management, a weak balance sheet, a lack of recurring revenue or pricing power. However, despite our steadfast commitment to investing in high-quality businesses, we are taking nothing for granted.

From the very first day of lockdown, our analysts have been working remotely. It has been business as normal. They have excelled themselves by speaking to all the companies held in the portfolio. They have learned how each company is coping in this new reality and checked that management and staff are safe and well. We have learned a great deal during these few months.

Opportunities are already emerging from the darkness of the pandemic - some of our companies are seeing their competitors fail while others have been able to raise capital on attractive terms to fund future growth. As always, the strong will emerge stronger from the ashes of the world economy. Montanaro has always retained high levels of cash precisely for times like these. In past bear markets we have grown the team. This is no exception as we recruited a healthcare analyst to join our team as well as two additions to our back office team.

The end of the financial year marks the 25th anniversary of MUSCIT. When I launched MUSCIT in March 1995, it was one of twenty seven UK SmallCap investment trusts. Today, there are just seven. MUSCIT was launched with £25 million; net assets are today approaching £200 million. We have seen several bull and bear markets over the years. We are pleased to have delivered to our shareholders a total return of c.9% per annum since launch (after fees).

I would like to take this opportunity to extend my thanks to our Chairmen and Directors, past and present, for their valuable support during this exciting journey. I am also humbled that so many of our shareholders who joined us in the early days of this journey are still with us today - we look forward to celebrating our 30th anniversary with all of you.

CHARLES MONTANARO

22 June 2020

Twenty Largest Holdings

As at 31 March 2020

1. Hilton Food Group plc A leading food packing business	8. 4imprint Group plc a supplier of promotional merchandise.	15. Diploma plc a supplier of specialised consumables in industrial seals, control systems and healthcare mainly in Europe and North America.
2. Integrafin Holdings plc a UK IFA platform provider.	9. Big Yellow Group plc a real estate investment trust focused on the self-storage market.	16. FDM Group Holdings plc a specialist service business that trains and places IT professionals.
3. Marshalls plc the UK's leading provider of hard landscaping products.	10. NCC Group A provider of software escrow and cyber security consulting services.	17. Dechra pharmaceuticals an animal health specialist.
4. Ideagen plc a supplier of Governance, Risk and Compliance software for highly regulated industries.	11. XP Power Ltd a provider of power solutions.	18. AJ Bell a leading online investment platform.
5. Discoverie a designer and manufacturer of components for electronic applications.	12. Restore the UK's number two document storage and shredding business.	19. Clarkson plc a leading shipping brokerage business.
6. Cranswick plc a supplier of premium meat products.	13. Porvair plc an industrial filtration and environmental technology specialist.	20. First Derivatives a database technology and consulting services provider.
7. Polypipe Group plc a supplier of plastic pipes and ventilation systems for residential, commercial and infrastructure.	14. Advance Medical Solutions Group a manufacturer of woundcare products, sutures and sealants.

Holding	Sector	Value £'000	Market cap £m	% of portfolio 31 March 2020	% of portfolio 31 March 2019
Hilton Food Group	Food Producers	8,910	883	4.6	3.4
Integrafin Holdings	Financial Services	8,710	1,443	4.5	2.7
Marshalls	Constructions & Materials	7,319	1,171	3.7	4.6
Ideagen	Software & Computer Services	7,290	367	3.7	2.4
Discoverie	Electronic & Electrical Equipment	6,874	439	3.5	1.7
Cranswick	Food Producers	6,472	1,933	3.3	2.4
Polypipe Group	Constructions & Materials	6,440	925	3.3	2.9
4lmprint Group	Media	6,273	542	3.2	4.0
Big Yellow Group	Real Estate Investment Trusts	6,024	1,762	3.1	3.7
NCC Group	Software & Computer Services	5,395	461	2.8	1.6
XP Power	Electronic & Electrical Equipment	5,357	507	2.7	2.5
Restore	Support Services	5,175	431	2.6	1.9
Porvair	Industrial Engineering	5,040	232	2.6	2.4
Advance Medical Solutions Group	Health Care Equipment & Services	5,020	539	2.6	2.1
Diploma	Support Services	4,842	1,828	2.5	3.2
FDM Group	Software & Computer Services	4,804	807	2.5	2.5
Dechra Pharmaceuticals	Pharmaceuticals & Biotechnology	4,704	2,420	2.4	1.8
AJ Bell	Financial Services	4,658	1,273	2.4	0.5
Clarkson	Industrial Transportation	4,620	702	2.4	2.1
First Derivatives	Software & Computer Services	4,560	623	2.3	1.8
Twenty Largest Holdings		118,485		60.6

A full portfolio listing is available on request from the Manager.

All investments are in Ordinary shares.

As at 31 March 2020, the Company did not hold any equity interests comprising more than 2.4% of any company's share capital.

Analysis of Investment Portfolio by Industrial or Commercial Sector

as at 31 March 2020

	31 March 2020		31 March 2019
Sector	% of portfolio	% of NSCI	% of portfolio	% of NSCI
Oil and Gas Producers	-	2.7	-	3.6
Oil Equipment, Services & Distribution	-	1.4	-	1.1
Oil and Gas	-	4.1	-	4.7
Chemicals	2.0	1.7	2.8	2.5
Industrial Metals	-	0.8	-	1.0
Mining	-	3.6	-	3.3
Basic Materials	2.0	6.1	2.8	6.8
Construction and Materials	7.0	4.4	7.4	4.8
Aerospace and Defence	-	3.1	-	1.9
General Industrials	-	1.7	-	1.0
Electronic and Electrical Equipment	9.6	2.8	5.9	1.8
Industrial Engineering	2.6	1.9	2.4	1.7
Industrial Transportation	4.6	2.3	4.7	2.3
Support Services	12.2	6.5	20.3	7.8
Industrials	36.0	22.8	40.7	21.3
Automobiles and Parts	-	1.2	-	0.6
Beverages	-	1.5	-	0.9
Food Producers	9.1	3.4	7.4	3.5
Household Goods and Home Construction	0.6	2.4	2.5	3.2
Leisure Goods	-	0.1	0.2	0.8
Personal Goods	-	1.5	-	1.3
Consumer Goods	9.7	10.2	10.1	10.3
Health Care, Equipment and Services	4.7	1.0	5.9	1.2
Pharmaceuticals and Biotechnology	4.8	2.2	3.1	1.5
Health Care	9.5	3.1	9.0	2.7
Food and Drug Retailers	-	-	-	1.3
General Retailers	-	4.1	1.3	6.4
Media	6.8	6.2	8.4	3.8
Travel and Leisure	0.6	8.0	3.5	9.8
Consumer Services	7.4	18.3	13.2	21.3
Fixed Line Telecommunications	-	2.2	-	1.9
Mobile Telecommunications	-	1.4	-	-
Telecommunications	-	3.6	-	1.9
Electricity	-	1.7	-	0.8
Utilities	-	1.7	-	0.8
Banks	-	1.5	-	1.5
Life and Non-life Insurance	-	4.4	-	2.3
Real Estate/Real Estate Investment Trusts	4.3	1.8	4.8	5.0
Real Estate Investment & Services	-	7.1	-	-
Financial Services	12.4	10.3	7.4	8.7
Financials	16.7	25.0	12.2	24.3
Software and Computer Services	18.7	3.4	12.0	5.1
Technology Hardware & Equipment	-	1.5	-	0.8
Technology	18.7	5.0	12.0	-
Total	100.0	100.0	100.0	100.0

The investment portfolio comprises 49 traded or listed UK equity holdings.

Business Model and Strategy

PRINCIPAL ACTIVITY

The Company carries on business as an investment trust and its principal activity is portfolio  management. Its Ordinary Shares are traded on the Main Market of the London Stock Exchange.

INVESTMENT OBJECTIVE

MUSCIT's investment objective is capital appreciation through investing in small quoted companies listed on the London Stock Exchange or traded on AIM and to outperform its benchmark, the NSCI.

No unquoted investments are permitted.

INVESTMENT POLICY

The Company seeks to achieve its objective and to manage risk by investing in a diversified portfolio of quoted UK small 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 2020, this was any company below £1.63 billion in size. The Manager focuses on the smaller end of this Index.

In order to manage risk, the Manager limits any one holding to a maximum of 4% of the Company's investments at the time of initial investment. 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 40%* of total investments, with Board approval required for exposure above 35%*.

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 constructed on a "bottom up" basis.

The AIFM, in consultation with the Board, is responsible for determining the gearing levels of the Company and has determined that the Company's borrowings should be limited to 25% of shareholders' funds. Gearing is used to enhance returns when the timing is considered appropriate. The Company currently has credit facilities totalling £30 million with ING Bank, of which £20 million was utilised via a Fixed Rate Term Loan as at 31 March 2020. Net gearing at that date amounted to 4.2%.

The Company will not invest more than 10%, in aggregate, of the value of its total assets at the time of investment in other investment trusts or investment companies admitted to the Official List of the UK Listing Authority.

* These investment restrictions were amended on 8 May 2018. Prior to this, AIM exposure was limited to 30% with Board approval required for exposure above 25%.

TAXATION POLICY

The Company complies at all times with Section 1158 of the Corporation Tax Act 2010 ("Section 1158") such that it does not suffer UK Corporation Tax on capital gains; and ensures that it submits correct taxation returns annually to HMRC and settles promptly any taxation due. The Board is fully committed to complying with applicable legislation and statutory guidelines, including the UK's Criminal Finances Act 2017, designed to prevent tax evasion in the jurisdictions in which the Company operates.

PRINCIPAL AND EMERGING RISKS

The Board carefully considers the Company's principal and emerging risks and seeks to mitigate these risks through regular review, policy setting, compliance with and enforcement of contractual obligations and active communication with the Manager, the Administrator and third party service providers. A core element of this process is the Company's risk register which identifies the Company's key risks, the likelihood and potential impact of each risk and the controls for mitigation.

The Board has carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.

A summary of the Company's risk management and internal control processes can be found in the Corporate Governance Statement within the full Annual Report and Accounts. Details of the principal and emerging risks and how these are mitigated are set out below. The principal financial risks are summarised in Note 15 to the financial statements.

Principal Risks	Mitigation
Liquidity and Discount Management: The Company's share price performance lags NAV performance due to poor performance, or because SmallCap is out of favour. The Company may be at risk from arbitrageurs or a sale from a sizeable shareholder.	The Board regularly reviews: • the relative level of discount against the sector; • investment performance − relative to the competition; and − the benchmark; • the underlying liquidity of the portfolio; and • the share register. The Company may buy back shares when it considers it to be in shareholders' best interests. The dividend policy was amended in July 2018 with the intention of attracting new investors and reducing the discount.
Poor Investment Performance: Returns achieved are reliant primarily on the performance of the portfolio. Underperformance relative to the benchmark and/or peer group may result in a loss of capital together with dissatisfied shareholders.	To manage the risk, a review is undertaken at each Board meeting with the Manager of portfolio performance against the benchmark and the peer group. The Board will seek: • to understand the reasons for any underperformance; and • comfort over the consistency of investment approach and style. Ultimately, the Board can terminate the Investment Management Agreement if unsatisfactory performance is considered irreversible and the causes cannot be rectified.
Risk Oversight: The Manager is taking too much risk in the portfolio leading to unacceptable volatility in performance or excessive portfolio turnover.	Risk oversight is primarily the responsibility of the AIFM, but the Board provides additional oversight through portfolio reviews at each Board meeting. Portfolio turnover is also reviewed at each Board meeting.
Gearing: One of the benefits of an investment trust is its ability to use borrowings, which can enhance returns to shareholders in a rising stock market. However, gearing exacerbates movements in the NAV both positively and negatively and will exaggerate declines in NAV when share prices of investee companies are falling.	The AIFM, in consultation with the Board, is responsible for determining the gearing levels of the Company, which is monitored at each Board meeting.
Key Man Risk: A change in the key investment management personnel involved in the management of the portfolio could impact on future investment performance and lead to loss of investor confidence.	The Manager operates a team approach in the management of the portfolio which mitigates against the impact of the departure of any one member of the investment team. There is an identified lead manager within Montanaro offering continuity of communication with the Company's shareholders. The Board is in regular contact with Montanaro and its designated Manager and will be asked for their approval to any proposed change in the lead manager.
Operational Risk: The Company has no employees, in common with most other investment trusts, and relies on services provided by third parties. It is therefore dependent on the control systems of the AIFM, depositary, custodian and administrator who maintain the Company's assets, dealing procedures and accounting records. Key operational risks include: • transactions not subject to best execution; • counterparty risk; • errors in settlement, title and corporate actions; • misstatement of NAV; and • breach of the Investment Policy.	The Board monitors operational issues and reviews them in detail at each Board meeting. All third party service providers are subject to annual review by the Audit and Management Engagement Committee as part of which their internal control reports are reviewed. The Company's assets are subject to a liability regime. Unless the Depositary is able to demonstrate that any loss of financial assets held in custody was the consequence of an event beyond its reasonable control, it must return assets of an identical type or the corresponding amount. Business continuity plans at all service providers have been implemented and services have continued with no disruption. The Manager has been in regular contact with the Board and has reported no matters of concern in continuity of operations.
Cyber Risk: The threat of cyber attack is regarded as being as important as more traditional physical threats to business continuity and security. The Company has limited direct exposure to cyber risk. However, the Company's operations or reputation could be affected if any of its service providers suffered a major cyber security breach.	The Board monitors the preparedness of its service providers and is satisfied that the risk is given due priority. The Manager provides a report to the Board at each meeting that covers cyber risk. The Company benefits from the network and information technology controls of the Manager around the security of data.
Breach of Regulation: The Company must comply with the provisions of the Companies Act 2006, the UK Listing Rules and Disclosure, Guidance & Transparency Rules, the Market Abuse Regulations and the Alternative Investment Fund Manager's Directive. Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings. The Company has been accepted by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions and operates as an investment trust in accordance with the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on profits realised from the sale of investments. Any breach of the relevant eligibility conditions could lead to the loss of investment trust status.	The Company Secretary and the Company's professional advisers provide reports to the Board in respect of compliance with all applicable rules and regulations. Compliance with the accounting rules affecting MUSCIT is closely monitored. During the year under review, the Company complied with all applicable rules and regulations including AIFMD, the Packaged Retail and Insurance-based Products Regulation and the second Markets in Financial Instruments Directive.
Financial: The Company's investment activities expose it to a variety of financial risks that include interest rate and liquidity risk. Events such as global pandemics could affect share prices in particular markets.	The liquidity of the portfolio is monitored by the Manager and reported to the Board, and market conditions and their impacts are considered. Further details on these risks are disclosed in note 15 to the financial statements.

KEY PERFORMANCE INDICATORS ("KPIs")

At each Board meeting, the Directors review performance by reference to a number of KPIs. The KPIs considered most relevant are those that demonstrate the Company's success in achieving its objectives.

The principal KPIs used to measure the progress and performance of the Company are set out below:

Performance to 31 March	%
	20201	20191
NAV per share total return2	(8.5)	0.5
Share price total return	(0.3)	(1.1)
Relative NAV3 per share
performance vs benchmark	17.4	1.7
Discount to NAV2,3,4	11.2	18.0
Ongoing charges ratio2	0.81	0.80

1 Returns for both 2019 and 2020 are Total Returns, i.e. including dividends reinvested.

2 Alternative performance measures. Please see the full Annual Report and Accounts for further information.

3 London Stock Exchange closing price.

4 The percentage difference between the share price and the NAV.

Performance

At each meeting, the Board reviews the performance of the portfolio as well as the NAV and share price. Performance is reviewed against the benchmark and compared with the performance of other companies in the peer group. Information on the Company's performance is given in the Highlights above.

Share price discount or premium to NAV

The Board monitors the level of the Company's premium or discount to NAV on an ongoing basis. The share price discount to NAV as at 31 March 2020 was 11.2%. During the year the shares traded at an average discount to NAV of 13.4%.

Further details setting out how the discount or premium at which the Company's shares trade is calculated is provided in the Alternative Performance Measures contained within the full Annual Report and Accounts.

Ongoing charges ratio

The Board reviews the ongoing charges and monitors the expenses incurred by the Company on an ongoing basis. Full details of how the ongoing charges ratio is calculated is included in the Alternative Performance Measures contained within the full Annual Report and Accounts.

VIABILITY STATEMENT

In accordance with the UK Corporate Governance Code, the Directors have assessed the prospects of  the Company over a period longer than the twelve months required by the 'Going Concern' provision and reviewed the viability of the Company and its future prospects over the five-year period to 31 March 2025.

In the absence of any adverse change to the regulatory environment and to the treatment of UK investment trusts, the rolling five-year period was determined by the Directors to:

· represent the horizon over which they do not expect there to be any significant change to the Company's principal risks or their mitigation; and

· the period over which they can form a reasonable expectation of the Company's prospects.

In its assessment, the Board took into account the Company's current financial position, its ability to meet liabilities as they fell due and the principal risks as set out above. In reviewing the financial position, the following factors were taken into consideration:

·the portfolio is comprised solely of cash balances and equity securities listed or traded on the London Stock Exchange;

·the current portfolio could be liquidated to the extent of 62% within five trading days and there is no expectation that the nature of the investments held within the portfolio will be materially different in future;

· future revenue and expenditure projections:

-  the expenses and interest payments of the Company are predictable and relatively small; and

-  there are no expected capital outlays.

In addition to considering the Company's principal risks and the financial position of the Company as referenced above, the Directors also took account of the following assumptions in considering the Company's longer-term viability:

· the Board and the Manager will continue to adopt a long-term view when making investments;

·it is reasonable to believe that the Company will maintain the credit facilities currently provided by ING Bank;

·the Company invests principally in the securities of quoted UK small companies to which investors will wish to continue to have exposure;

· the Company has a large margin of safety over the covenants on its debt;

· there will continue to be demand for investment trusts;

·as determined at the AGM held in 2017, the next continuation vote will be in 2022. Further details are provided in the Directors Report contained within the full Annual Report and Accounts;

· regulation will not increase to a level that makes the running of the Company uneconomic; and

· the performance of the Company will be satisfactory.

Since the global outbreak of COVID-19 materially impacting global markets in recent months, all necessary actions have been undertaken to preserve the financial condition of the Company and to ensure that it is able to operate effectively. Since 18 March 2020, the majority of the Manager's employees have been working from home in accordance with government requirements. The Company has successfully continued to manage its portfolios and the associated administration. Despite market volatility negatively impacting performance in March and the fact that the resulting economic disruption caused by the crisis will likely create further challenges for the Company in the coming months, the Board considers that the Company's available resources are more than sufficient to ensure its continuing viability.

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

FUTURE PROSPECTS

The Board's main focus is the achievement of capital appreciation and outperformance of the benchmark. The future of the Company is dependent upon the success of the Company's investment strategy. The Company's outlook is discussed in the Chairman's Statement and the Manager's Report above.

MODERN SLAVERY ACT 2015

As an investment trust, the Company does not provide goods or services in the normal course of business and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.

DIRECTORS AND GENDER REPRESENTATION

As at 31 March 2020, the Board of Directors comprised two male Directors and one female Director. The Board acknowledges the benefits of diversity, including gender diversity and it remains committed to ensuring that the Company's Directors bring a wide range of skills, knowledge, experience, backgrounds and perspectives.

The Chairman's Statement, the Manager's Report and the portfolio analysis also form part of the Strategic Report. The Strategic Report was approved by the Board at its meeting on 22 June 2020.

On behalf of the Board

ARTHUR COPPLE

Chairman

22 June 2020

Related Party Transactions

The following are considered related parties: the Board of Directors. The Directors of the Company received fees for their services and dividends from their shareholdings in the Company. None of the Directors has a service contract with the Company.  For the year ended 31 March 2020, the Chairman received an annual fee of £35,000, the Chairman of the Audit and Management Engagement Committee received an annual fee of £28,000 and the other Directors received an annual fee of £24,000. 

The related party transactions with the Directors are set out in the Directors' Remuneration Report contained within the Company's full Annual Report and Accounts for the year ended 31 March 2020. 

As at 31 March 2020 and 1 April 2019, the Directors' interests in the Company's Ordinary shares were as follows:

	As at	As at
	31 March 2020 No. of Shares	1 April 2019 No. of Shares
Arthur Copple1	125,000	125,000
Catriona Hoare2	7,250	-
James Robinson3	40,000	40,000
Roger Cuming4	-	50,000
Kate Bolsover5	-	8,345

1  Includes 25,000 shares held by Mrs Copple.

2  Appointed on 19 November 2019

3  Held jointly by Mr and Mrs Robinson.

4  Retired on 25 July 2019

5  Resigned on 19 November 2019

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 below.

Statement of Directors' Responsibilities

in respect of the Annual Report and the Financial Statements

The Directors are responsible for preparing the Annual 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) including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland".

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:

·select suitable accounting policies and then apply them consistently;

·make judgements and estimates that are reasonable and prudent;

·state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

·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 that:

· 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

· 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.

In the opinion of the Board, 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

ARTHUR COPPLE

Chairman

22 June 2020

Income Statement

for the year to 31 March 2020

		Year to 31 March 2020			Year to 31 March 2019
	Notes	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Losses on investments designated as fair value through profit or loss	9	-	(19,776)	(19,776)	-	(5,762)	(5,762)
Dividends and interest	2	5,596	-	5,596	5,109	-	5,109
Management fee	3	(330)	(989)	(1,319)	(320)	(959)	(1,279)
Other expenses	4	(527)	-	(527)	(516)	-	(516)
Net return before finance costs and taxation		4,739	(20,765)	(16,026)	4,273	(6,721)	(2,448)
Interest payable and similar charges	5	(160)	(480)	(640)	(148)	(441)	(589)
Net return before taxation		4,579	(21,245)	(16,666)	4,125	(7,162)	(3,037)
Taxation	6	(8)	-	(8)	(7)	-	(7)
Net return after taxation		4,571	(21,245)	(16,674)	4,118	(7,162)	(3,044)
Return per Ordinary share: Basic and Diluted	8	2.73p	(12.69p)	(9.96p)	2.46p	(4.28p)	(1.82p)

The total column of this statement is the Statement of Total Comprehensive Income of the Company prepared in accordance with FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland". The supplementary revenue return and capital return columns are prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies ("AIC SORP").

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

There are no items of other comprehensive income and therefore the net loss after taxation is both the profit/loss and the total comprehensive income for the year.

No operations were acquired or discontinued in the year.

The notes below form part of these financial statements.

Statement of Changes in Equity

for the year to 31 March 2020

Year to 31 March 2020	Notes	Called-up share capital £'000	Share premium Account £'000	Capital redemption reserve £'000	Special reserve* £'000	Capital reserve* £'000	Distributable revenue    reserve* £'000	Total equity shareholders' funds £'000
As at 31 March 2019		3,348	19,307	1,362	4,642	184,267	3,296	216,222
Total comprehensive income:
Fair value movement of investments	9	-	-	-	-	(19,776)	-	(19,776)
Costs allocated to capital		-	-	-	-	(1,469)	-	(1,469)
Net revenue for the year		-	-	-	-	-	4,571	4,571
		-	-	-	-	(21,245)	4,571	(16,674)
Dividends paid in the year	7	-	-	-	-	(3,265)	(5,874)	(9,139)
As at 31 March 2020		3,348	19,307	1,362	4,642	159,757	1,993	190,409
Year to 31 March 2019	Notes	Called-up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Special reserve* £'000	Capital reserve* £'000	Distributable revenue  reserve* £'000	Total equity shareholders' funds £'000
As at 31 March 2018		3,348	19,307	1,362	4,642	191,463	7,213	227,335
Total comprehensive income:
Fair value movement of investments	9	-	-	-	-	(5,762)	-	(5,762)
Costs allocated to capital		-	-	-	-	(1,400)	-	(1,400)
Net revenue for the year		-	-	-	-	-	4,118	4,118
		-	-	-	-	(7,162)	4,118	(3,044)
Costs in relation to share spilt		-	-	-	-	(34)	-	(34)
Dividends paid in the year	7	-	-	-	-	-	(8,035)	(8,035)
As at 31 March 2019		3,348	19,307	1,362	4,642	184,267	3,296	216,222

* These reserves are distributable, excluding any unrealised capital reserve. The special reserve can be used for the repurchase of the Company's own shares.

The notes below form part of these financial statements.

Balance Sheet

as at 31 March 2020

		31 March 2020		31 March 2019
	Notes	£'000	£'000	£'000	£'000
Fixed assets
Investments at fair value	9		195,593		229,476
Current assets
Debtors	10	3,049		403
Cash at bank		12,097		6,663
		15,146		7,066
Creditors: amounts falling due within one year
Other creditors	11	(330)		(320)
		(330)		(320)
Net current assets			14,816		6,746
Total assets less current liabilities			210,409		236,222
Creditors: amounts falling due after more than one year
Fixed rate term loan	12		(20,000)		(20,000)
Net assets			190,409		216,222
Share capital and reserves
Called-up share capital	13		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			159,757		184,267
Distributable revenue reserve			1,993		3,296
Total equity shareholders' funds			190,409		216,222
Net asset value per Ordinary share: Basic and Diluted			113.76p		129.18p

These financial statements were approved and authorised for issue by the Board of Directors 22 June 2020.

ARTHUR COPPLE

Chairman

Company Registered Number: 3004101

The notes below form part of these financial statements.

Notes to the Financial Statements

at 31 March 2020

1 Accounting Policies 

Montanaro UK Smaller Companies Investment Trust plc ("MUSCIT") is a company incorporated and registered in England and Wales. The principal activity of the Company is that of an investment trust company within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010. The registered office of the Company is 6th Floor, 65 Gresham Street, London, EC2V 7NQ.

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 November 2014 and updated in January 2017. The financial statements have been prepared under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'. Following the adoption of  FRS 102, the Company elected not to present the statement of cash flows per paragraph 7.1.A. 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.

GOING CONCERN

The financial statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue to be met.

The Directors have made an assessment of the Company's ability to continue as a going concern and are satisfied that the Company has the resources to continue in business for the foreseeable future, being a period of at least 12 months from the date these financial statements were approved. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Company's ability to continue as a going concern, having taken into account the liquidity of the Company's investment portfolio and the Company's financial position in respect of its cash flows, borrowing facilities and investment commitments (of which there are none of significance). In particular, the Directors considered the impact of disruptions arising from the global pandemic on the Company's liquidity, market values, bank covenants and continuity of operations in reaching their conclusion and they continue to adopt the going concern basis in preparing the financial statements.

SEGMENTAL REPORTING
The Company has one reportable segment being invested primarily in a portfolio of quoted UK small companies.

INCOME RECOGNITION

Dividends receivable on quoted equity shares are taken to revenue on an ex-dividend basis. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established. Fixed returns on non-equity shares are recognised on a time-apportioned basis.

Dividends from overseas companies are shown gross of any non-recoverable withholding taxes, which are presented separately in the Income Statement.

Special dividends are taken to revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the Board reviews all relevant information as to the reasons for the sources of the dividend on a case-by-case basis.

When the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend forgone is recognised as income. Any excess in the value of the cash dividend is recognised in the capital column.

EXPENSES AND FINANCE COSTS 
All expenses and finance costs are accounted for on an accruals basis. On the basis of the Board's expected long-term split of total returns, the Company charges 75% of its management fee and finance costs to capital.

Expenses directly incurred in relation to arranging debt and loan facilities have been capitalised and amortised over the term of the finance. Expenses incurred directly in relation to issue or redemption of shares are deducted from equity and charged to the share premium account. All other expenses are allocated in full to the revenue account.

INVESTMENTS

The Company's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Company's Board of Directors. The Company has fully adopted sections 11 and 12 of FRS 102.

All investments are classified upon initial recognition as financial assets at fair value through profit or loss and are measured at subsequent reporting dates at fair value, which is the bid price or the closing price for the Stock Exchange Electronic Trading Service - quotes and crosses ('SETSqx'). The Company derecognises a financial asset either when the contractual rights to the cash flows from the asset expire or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition of a financial asset, the difference between the asset's carrying amount and the sum of consideration received and receivable and the cumulative gain or loss that had been accumulated is recognised in profit or loss.

All investments for which fair value is measured in the financial statements are categorised within the fair value hierarchy in note 9.

TAXATION

The charge for taxation is based on the net return for the year. Deferred taxation is provided in accordance with FRS 102 on all timing differences that have originated but not reversed by the Balance Sheet date. Provision is made for deferred taxation on the liability method, without discounting, on all timing differences calculated at the current rate of tax relevant to the benefit or liability. Deferred taxation assets are only recognised to the extent that they are regarded as recoverable.

DIVIDENDS PAYABLE TO SHAREHOLDERS

Final dividends are recognised in the year in which they have been approved by shareholders in a general meeting. Interim dividends are recognised in the period in which they have been declared and paid.

BANK LOANS AND BORROWINGS 
All bank loans and borrowings are carried at amortised cost. Costs in relation to arranging debt finance have been capitalised and are amortised over the term of the instrument. Hence, amortised cost is the par value less the unamortised cost of issue.

RESERVES

Share premium

The account represents the accumulated premium paid for shares issued in previous periods above their nominal value less expenses of issuance.

Capital redemption reserve

The capital redemption reserve accounts for amounts by which the issued capital is diminished through the repurchase and cancellation of the Company's own shares.

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.

Capital reserve 
The following are accounted for in this reserve:

· gains and losses on the realisation of investments;

· net movement arising from changes in the fair value of investments;

· net movement from changes in the fair value of derivative financial instruments;

·expenses, together with related taxation effect, charged to this account in accordance with the above policies.

2 Income

	Year to 31 March 2020 £'000	Year to 31 March 2019 £'000
UK dividend income	5,346	4,908
Overseas dividend income	250	201
Income from investments	5,596	5,109
Total income	5,596	5,109
Total income comprises
Dividends from financial assets designated at fair value through profit or loss	5,596	5,109
Dividends and interest	5,596	5,109

3 Management fee

	Year to 31 March 2020			Year to 31 March 2019
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Management fee	317	952	1,269	307	922	1,229
AIFMD fee	13	37	50	13	37	50
	330	989	1,319	320	959	1,279

The Manager received a monthly management fee equivalent to 1/12 of 0.50% (2019: 0.50%) of the gross assets of the Company valued at the close of business on the last business day of each month.

At 31 March 2020, £88,000 (2019: £99,000) was due for payment to the Manager.

4 Other expenses

	Year to 31 March 2020 £'000	Year to 31 March 2019 £'000
Administration	76	72
Company secretarial fees	46	36
Directors' feesⱡ	96	103
Depositary fee	64	75
Registrar fee	51	39
Auditor's remuneration for: -  audit	30	23
Custody and other bank charges	22	21
Legal fees	9	6
Other expenses (including VAT)	133	141
	527	516

† 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.

5 Interest Payable and Similar Charges

	Year to 31 March 2020			Year to 31 March 2019
Financial liabilities	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Interest payable on loan	152	456	608	134	402	536
Loan commitment fee	8	24	32	14	41	44
	160	480	640	148	443	591

6 Taxation

	Year to 31 March 2020			Year to 31 March 2019
Analysis of charge in year	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Current tax:
Overseas tax suffered	(8)	-	(8)	7	-	7
	(8)	-	(8)	7	-	7

The taxation charge for the year is different from the standard rate of Corporation Tax in the UK of 19% (2019: 19%). The differences are explained below.

	Year to 31 March 2020			Year to 31 March 2019
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net return/(loss) before taxation	4,579	(21,245)	(16,666)	4,125	(7,162)	(3,037)
Theoretical tax at UK corporation tax rate of 19% (2019: 19%)	870	(4,037)	(3,167)	784	(1,367)	(583)
Effects of:
-UK dividends that are not taxable	(1,016)	-	(1,016)	(878)	-	(878)
-Foreign dividends that are not taxable	(47)	-	(47)	(38)	-	(38)
-Non-taxable investment losses	-	3,757	3,757	-	1,095	1,095
-Irrecoverable overseas tax	8	-	8	7	-	7
-Disallowed expenses	-	-	-	-	6	6
-Unrelieved excess expenses	193	280	473	132	266	398
Taxation charge for the year	8	-	8	7	-	7

Factors that may affect future tax charges

Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an Investment Trust company. At 31 March 2020, based on current estimates and including the accumulation of net allowable losses, the Company had unrelieved losses of £47,788,000 (2019: £45,562,000) that are available to offset future taxable revenue. A deferred tax asset of £9,080,000 (2019: £8,657,000) has not been recognised because the Company is not expected to generate sufficient taxable income in future periods in excess of the available deductible expenses and accordingly, the Company is unlikely to be able to reduce future tax liabilities through the use of existing surplus losses.

7 Dividends

	Year to 31 March 2020 £'000	Year to 31 March 2019 £'000
In respect of the previous period:
Paid
2019 first quarter dividend of 1.29p	2,159	-
In respect of the year under review:
Paid
2019 second quarter dividend of 1.32p (2018: 2.2p)	2,209	3,682
2019 third quarter dividend of 1.31p (2018: 1.43p)	2,193	2,394
2019 fourth quarter dividend of 1.54p (2018: 1.17p)	2,578	1,958
Dividends distributed during the year	9,139	8,034
Declared:
2020 first quarter dividend of 1.14p (2019: 1.29p)	1,908	2,159

The first dividend distribution of 1.32 pence per Ordinary share in respect of the second quarter of 2019 was paid on 23 August 2019. The record date was 26 July 2019.

The second dividend distribution of 1.31 pence per Ordinary share in respect of the third quarter of 2019 was paid on 22 November 2019 to shareholders on the register at the close of business on 25 October 2019.

The third dividend distribution of 1.54 pence per Ordinary share in respect of the fourth quarter of 2019 was paid on 6 March 2020 to shareholders on the register at the close of business on 7 February 2020.

The fourth dividend distribution of 1.14 pence per Ordinary share in respect of the first quarter of 2020 was declared on 14 April 2020 and was paid on the 26 May 2020 to shareholders on the register at the close of business on 24 April 2020.

8 Return/(loss) per Ordinary Share

	Year to 31 March 2020			Year to 31 March 2019
	Revenue	Capital	Total	Revenue	Capital	Total
Ordinary share	2.73p	(12.69p)	(9.96p)	2.46p	(4.28p)	(1.82p)

Revenue return per Ordinary share is based on the net revenue after taxation of £4,571,000 (2019: £4,118,000) and 167,379,790 (2019: 167,379,790) Ordinary shares, being the weighted average number of Ordinary shares, excluding any shares held in treasury.

Capital return/(loss) per Ordinary share is based on net capital gains/(losses) for the year of £(21,245,000) (2019: £(7,162,000)), and on 167,379,790 (2019: 167,379,790) Ordinary shares, being the weighted average number of Ordinary shares, excluding any shares held in treasury.

Basic and diluted return/(loss) per share are the same as there are no dilutive elements on share capital.

9 Investments

	Year to 31 March 2020 £'000	Year to 31 March 2019 £'000
Total investments at fair value	195,593	229,476

The investment portfolio comprises 49 (2019: 51) traded and listed UK equity holdings.

	Year to 31 March 2020 £'000	Year to 31 March 2019 £'000
Opening book cost	189,029	172,541
Opening investment holding gains	40,447	60,929
Opening valuation	229,476	233,470
Movements in the year
Purchases at cost	66,685	47,809
Sales - proceeds	(80,792)	(46,041)
- realised gains on sale	8,500	14,720
(Decrease) in investment holding gains	(28,276)	(20,482)
Closing valuation	195,593	229,476
Closing book cost	183,422	189,029
Closing investment holding gains	12,171	40,447
	195,593	229,476

FAIR VALUE HIERARCHY

Financial assets of the Company are carried in the Balance Sheet at their fair value or approximation of fair value. The fair value is the amount at which the asset could be sold in an ordinary transaction between market participants, at the measurement date, other than a forced or liquidation sale. The Company measures fair values using the following hierarchy that reflects the significance of the inputs used in making the measurements.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset as follows:

· Level 1 - Valued using quoted prices, unadjusted in active markets for identical assets and liabilities.

·Level 2 - Valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted prices included in level 1.

·Level 3 - Valued by reference to valuation techniques using inputs that are not based on observable market data for the asset or liability. Assessing the significance of a particular input requires judgement, considering factors specific to the asset or liability.

The table below sets out the fair value measurement of financial assets and liabilities in accordance with the fair value hierarchy.

	Year to 31 March 2020			Year to 31 March 2019
	Level 1 £'000	Level 2 £'000	Total £'000	Level 1 £'000	Level 2 £'000	Total £'000
Equity investments	195,593	-	195,593	229,476	-	229,476
	195,593	-	195,593	229,476	-	229,476

There were no level 2 or 3 investments.

TRANSACTION COSTS 
During the year, the Company incurred transaction costs of £226,000 (2019: £142,000) and £35,000 (2019: £27,000) 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 31 March 2020 £'000	Year to 31 March 2019 £'000
Net gains on investments at fair value
Gains on sales	8,500	14,720
Changes in fair value	(28,276)	(20,482)
	(19,776)	(5,762)

A list of the twenty largest holdings by market value and an analysis of the investment portfolio by industrial or commercial sector can be found above.

10 Debtors

	Year to 31 March 2020 £'000	Year to 31 March 2019 £'000
Prepayments and accrued income	59	55
Due from brokers	2,692	-
Dividends receivable	298	348
	3,049	403

11 Other Creditors

	Year to 31 March 2020 £'000	Year to 31 March 2019 £'000
Accruals	330	320
	330	320

12 Fixed Rate Term and Floating Rate Revolving Credit Facilities

	Year to 31 March 2020 £'000	Year to 31 March 2019 £'000
Falling due after more than one year	20,000	20,000
	20,000	20,000

On 19 December 2016, the Company agreed a £20,000,000 Fixed Rate Term Loan Facility with ING Bank N.V. At the same time, the Company also entered into a £10,000,000 Floating Rate Revolving Credit Facility.

The Fixed Rate Term Loan Facility is available for a five-year term from 19 December 2016 to 19 December 2021. The loan was fully drawn down at 31 March 2020 and 31 March 2019. Interest is payable at a fixed rate of 2.68% per annum in both the current and prior year.

The Floating Rate Revolving Credit Facility is available for a five-year term from 19 December 2016 to 19 December 2021. None of this facility was utilised at 31 March 2020 and 31 March 2019. When drawn down, interest is payable at LIBOR plus a margin of 1.65% per annum and mandatory costs. A Commitment fee is payable on the daily undrawn balance at 0.55% per annum in the event that the average utilisation is less than 50% during the applicable quarter or 0.40% per annum in the event  that the average utilisation is greater than 50% during the applicable quarter.

The facilities contain covenants which require that total borrowing will not at any time exceed 30% of the adjusted NAV, which itself shall not fall below £80,000,000 in respect of both facilities. The Company remained compliant with these covenants throughout the year.

13 Share Capital

	31 March 2020 £'000	31 March 2019 £'000
Allotted, called-up and fully paid:
167,379,790 Ordinary shares of 2p each (2019: 167,379,790)	3,348	3,348

Treasury shares

At the AGM on 25 July 2019, the Company was granted the authority to purchase 25,090,230 Ordinary shares. This authority is due to expire at the conclusion of the next AGM.

There were no shares held in treasury at any time during the year (2019: nil) and no shares purchased during the year (2019: nil).

14 Net Asset Value per Ordinary Share

Net asset value per Ordinary share is based on net assets of £190,409,000 (2019: £216,222,000) and on 167,379,790 (2019: 167,379,790) Ordinary shares, being the number of Ordinary shares in issue at the year end.

15 Analysis of Financial Assets and Liabilities

Investment Objective and Policy

The Company's investment objective and policy are detailed above.

The Company's investing activities in pursuit of its investment objective involve certain inherent risks. The Company's financial instruments can comprise:

· shares and debt securities held in accordance with the Company's investment objective and policies;

· derivative instruments for efficient portfolio management, gearing and investment purposes; and

· cash, liquid resources and short-term debtors and creditors that arise from its operations.

The risks identified arising from the Company's financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency exposure risk), liquidity risk and credit and counterparty risk. The Company may enter into derivative contracts to manage risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below.

These policies have remained unchanged since the beginning of the accounting period.

Market risk

Market risk arises mainly from uncertainty about future prices of financial instruments used in the Company's business. It represents the potential loss the Company might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Manager on a regular basis and the Board at quarterly meetings with the Manager.

Market price risk

Market price risk (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.

The Board manages the risks inherent in the investment portfolio by ensuring full and timely reporting of relevant information from the Manager. Investment performance and exposure are reviewed at each Board meeting.

The maximum exposure to market price risk is the fair value of investments of £195,593,000 (2019: £229,476,000).

If the investment portfolio valuation fell by 10% from the amount detailed in the financial statements as at 31 March 2020, it would have the effect, with all other variables held constant, of reducing the net capital return before taxation by £19,960,000 (2019: £22,950,000). An increase of  0% in the investment portfolio valuation would have an equal and opposite effect on the net capital return before taxation. The analysis is based on closing balances only and is not representative of the year as a whole.

Foreign currency risk

Any income denominated in a foreign currency is converted into Sterling upon receipt. At the Balance Sheet date, all the Company's assets were denominated in Sterling and accordingly the only currency exposure the Company currently has is through the trading activities of its investee companies.

Interest rate risk

Changes in interest rates may cause fluctuations in the income and expenses of the Company. The Company has a Fixed Rate Term Loan Facility (see note 12) so this would not be affected by any changes in interest rates. The Company also has a Floating Rate Revolving Credit Facility. This was undrawn at the year end so would not yet be affected by any changes in interest rates.

The Company received no interest on cash deposits in the year (2019: £nil).

If interest rates had reduced by 1% from those paid as at 31 March 2020, it would have the effect, with all other variables held constant, of increasing the net revenue return before taxation on an annualised basis by £nil (2019: £nil). If there was an increase in interest rates of 1%, the net revenue return before taxation on an annualised basis would have decreased by £nil (2019: £nil).

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. The investments consist of UK small companies which, whilst less liquid than quoted large companies, are quoted and tradeable on a recognised stock exchange.

The Company's liquidity risk is managed on a daily basis by the Manager in accordance with established policies and procedures in place. The Manager reviews daily forward-looking cash reports which project cash obligations. These reports allow it to manage its obligations as they fall due.

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 Company's listed and traded investments are held on its behalf by The Bank of New York Mellon, 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 report.

Investment transactions are carried out with a number of brokers whose creditworthiness is reviewed by the Manager.

Transactions are ordinarily undertaken on a delivery versus payment basis within CREST, whereby the transaction will only settle if the Company and counterparty details are matching.

The maximum exposure to credit risk at 31 March 2020 was:

	31 March 2020 £'000	31 March 2019 £'000
Cash at bank (held at Bank of New York Mellon)	12,097	6,663
Debtors and prepayments	3,049	403
	15,146	7,066

None of the Company's assets are past due or impaired.

Gearing

Gearing can have amplified effects on the NAV of the Company. It can have a positive or negative effect depending on portfolio performance. It is the Company's policy to determine the level of gearing appropriate to its own risk profile.

The AIFM, in consultation with the Board, is responsible for determining the gearing level of the Company, which is disclosed above. The Directors receive financial information on a regular basis which is used to identify and monitor risk.

FINANCIAL ASSETS 
The Company's financial assets consist of listed and traded 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 2020 (31 March 2019: £Nil) or at any time during the year. All financial assets are in Sterling.

FINANCIAL LIABILITIES 
The Company finances its operations through equity, retained profits and bank borrowings (see note 12).

The interest rate risk profile of the financial liabilities of the Company as at 31 March 2020 was as follows:

	Total £'000	Weighted average interest rate %	Period until maturity Years
Amounts drawn down under Fixed Rate Term Loan Facility	20,000	2.7	1.7
Amounts drawn down under Floating Rate Revolving Credit Facility	-	-	-
Financial liabilities upon which no interest is paid	330	-	-

The interest rate risk profile of the financial liabilities of the Company as at 31 March 2019 was as follows:

	Total £'000	Weighted average interest rate %	Period until maturity Years
Amounts drawn down under Fixed Rate Term Loan Facility	20,000	2.7	2.7
Amounts drawn down under Floating Rate Revolving Credit Facility	-	-	-
Financial liabilities upon which no interest is paid	320	-	-

The maturity profile of the Company's financial liabilities is as follows:

	31 March 2020 £'000	31 March 2019 £'000
In three months or less	423	418
In more than three months but not more than one year	432	437
In more than one year but not more than three years	20,383	20,919
In more than three years but not more than five years	-	-
	21,238	21,774

16 Capital Management Policies

The structure of the Company's capital is described in the full Annual Report and Accounts and details of the Company's reserves are shown in the Statement of Changes in Equity.

The Company's capital management objectives are:

· to ensure that it will be able to continue as a going concern;

· to achieve capital growth through a focused portfolio of investments, particularly in UK small companies; and

· to maximise the return to shareholders while maintaining a capital base to allow the Company to operate effectively and meet obligations as they fall due.

The Board and the AIFM regularly monitor and review the capital on an ongoing basis. These reviews include:

·the level of gearing, which takes account of the Company's position and the Manager's views on the market; and

· the extent to which revenue in excess of that which is required to be distributed should be retained.

The Company's objectives, policies and processes for managing capital are unchanged from last year.

The Company is subject to externally imposed capital requirements:

As a public company, the Company is required to have a minimum share capital of £50,000; and

In accordance with the provisions of Sections 832 and 833 of the Companies Act 2006, the Company as an investment company:

· is only able to make a dividend distribution to the extent that the assets of the Company are equal to at least one and a half times its liabilities after the dividend payment has been made; and

· is required to make a dividend distribution each year such that it does not retain more than 15% of the income that it derives from shares and securities.

These requirements are unchanged since last year and the Company has complied with them at all times.

17 Commitments and Contingent Liabilities

At 31 March 2020, there were no capital commitments or contingent liabilities (2019: nil).

18 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 above.

The related party transactions with the Directors are set out above and in the Directors' Remuneration Report contained within the full Annual Report and Accounts.

19 Post Balance Sheet Event

Subsequent to the year end, the Company's NAV recovered from the sharp decline experienced in the final quarter of the Financial Year as the global COVID-19 crisis unfolded. Between 31 March 2020 and the date of this report, the NAV rose from 113.8p to 128.5p, an increase of 13.0%.

Principal Advisers 

Investment Manager and Alternative Investment Fund Manager ('AIFM') MONTANARO ASSET MANAGEMENT LIMITED 53 Threadneedle Street London EC2R 8AR Tel: [phone] Fax: [phone] Website: www.montanaro.co.uk Email: [e-mail]	Depositary THE BANK OF NEW YORK MELLON (INTERNATIONAL) LIMITED One Canada Square London E14 5AL
Administrator LINK ALTERNATIVE FUND ADMINISTRATORS LIMITED Beaufort House 51 New North Road Exeter EX4 4EP Tel: [phone] Fax: [phone]	Custodian BANK OF NEW YORK MELLON SA/NV London Branch One Canada Square London E14 5AL
Company Secretary and Registered Office LINK COMPANY MATTERS LIMITED 65 Gresham Street London EC2V 7NQ Tel: [phone] Email: [e-mail]	Banker ING BANK N.V. London Branch 60 London Wall London EC2M 5TQ
Registrar LINK ASSET SERVICES Shareholder Services Department The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Tel: [phone] (calls will cost 12p per minute plus network charges) Email: [e-mail] Website: www.linkassetservices.com	Broker CENKOS SECURITIES PLC 6.7.8 Tokenhouse Yard London EC2R 7AS Auditor ERNST & YOUNG LLP 25 Churchill Place London E14 5EY

The information set out in this announcement does not constitute the Company's full statutory accounts for the year ended 31 March 2020 in terms of Section 434 of the Companies Act 2006 but is derived from those accounts. Statutory accounts for the year ended 31 March 2020 will be posted to Shareholders and delivered to the Registrar of Companies, in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors 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 Auditors' report can be found in the Company's full Annual Report and Accounts. Audited statutory accounts for the year to 31 March 2019, which were unqualified, have been lodged with the Registrar of Companies.

The full audited Annual Report and Accounts for the year ended 31 March 2020 will be posted to shareholders in due course and will be available on the Manager's website www.montanaro.co.uk . It will also be shortly submitted to the to the National Storage Mechanism ("NSM") and will be available for inspection there, situated at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism .

For further information, please contact:

Montanaro Asset Management Limited

Tel: [phone]

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.

 

END

 

 

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