Final Results

Montanaro UK Smaller Companies Trust

Jun 18 2019 08:00 BSTSource: RNS

RNS Number : 5247C

Montanaro UK Smlr Cos Inv Tst PLC

18 June 2019

MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC

(LEI: 213800UDDXXTXIF29P85)

Annual Results announcement for the year ended 31 March 2019

Highlights

for the year ended 31 March 2019

Performance

Total Returns	1 year	3 year	5 year	10 year	Since launch
Ordinary share price	(1.1)	25.4	18.2	338.0	724.4
Net Asset Value ("NAV")	0.5¹	24.2	23.0	317.2	828.2
Benchmark (Composite)	(1.2)	23.4	28.2	307.0	n.a.

Sources: Morningstar Direct, Numis, Bloomberg.

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.

	2019	2018	% change
For the year ended 31 March
Revenue return per Ordinary share	2.5p	2.5p²	-
Dividend per Ordinary share	3.9p	2.2p²	77.3
Ongoing charges³	0.80%	0.78%
Portfolio turnover³	20.0%	26.8%
As at 31 March
Ordinary share price	106.0p	112.0p²	(5.4)
NAV per Ordinary share³	129.2p	135.8p²	(4.9)¹
Discount to NAV³	18.0%	17.5%
Gross assets³	£236.2m	£247.3m	(4.6)
Net assets	£216.2m	£227.3m	(4.9)
Market capitalisation	£177.4m	£187.5m	(5.4)
Net gearing employed³	6.2%	2.9%

1 The difference between the NAV Total Return and the NAV per Ordinary Share Return reflects the move from annual to quarterly dividends and the impact of reinvested dividends.

2 2018 figures restated to reflect the subsequent five for one share split.

3 Details provided in the glossary contained within the Company's Annual Report for the year ended 31 March 2019.

Chairman's Statement

Background

I am pleased to present the twenty-fourth annual report of MUSCIT for the year ended 31 March 2019.

An investment trust is an attractive vehicle for shareholders to invest in quoted UK "smaller" companies, which are less well researched and more illiquid than larger, blue chip companies.

Since inception in 1995, the Company has delivered a cumulative net asset value ("NAV") total return of 828%.

Results

The eagle-eye reader will have noticed that the Highlights page of the Annual Report has changed compared to last year. Following the change of dividend policy that took place during the year (see further details under "Corporate Events"), as a Board we felt that it was important to clearly state the returns earned by our shareholders including the impact of dividends reinvested. We will continue to report performance on a Total Return basis for both the Company and the Benchmark in future.

In what proved to be a challenging year, I am pleased to report a positive 0.5% Net Asset Value return (with dividends reinvested) for the year ended 31 March 2019. Although only a small improvement, it represented a 1.7% outperformance of our benchmark, the NSCI (excluding investment companies) Index (also with dividends reinvested). Compared with the index but including companies traded on AIM, the outperformance was just under 5%.

Although, the share price fell by 5.4% over the 12 month period, it was down only 1.1% with dividends reinvested.

Discount

The discount of MUSCIT's share price to NAV, as shown in the graph on page 3 contained within the Company's Annual Report for the year ended 31 March 2019, stood at 18% at the end of the last financial year. Following the announcement of the new dividend policy in July 2018, there was increased interest from private investors and the discount narrowed significantly. The subsequent market sell off saw the discount move back out. This wider discount, combined with the low level of the UK Small Cap market means that the Company's shares appear to offer comparatively good value at the time of writing.

Share Buy Backs

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

As at 31 March 2019, no shares were held in treasury.

Corporate Events

At last year's AGM held on 18 July 2018, shareholders approved a five for one share split. Although the share split did not affect the overall value of the Company, it increases the liquidity in the market for the Company's shares.

A more substantive change was the significant increase in dividend distributions announced on 25 July 2018. Since the great financial crisis of 2008, central banks worldwide have artificially depressed interest rates. Expectations of a return to a more normal interest rate environment have repeatedly been disappointed and consequently there has been a continuing demand for income.

To meet this need and increase the attractiveness of the Company's shares, our new policy is 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.

The revised dividend policy was effective from the financial quarter ending

30 September 2018. As a result, 1.43p was paid on 23 November 2018. A further 1.17p was paid on 22 February 2019 and 1.29p on 24 May 2019 with another dividend due in August for the financial quarter ending June 2019.

I must stress that there will be no change to the Company's investment philosophy and approach. The Manager will continue to look for high quality companies that have strong growth prospects and avoid those with stretched balance sheets, poor cash generation, incomprehensible accounts or structurally challenged business models.

Environmental, Social and Governance (ESG)

There is an increasing trend for investment managers to highlight their ESG credentials, however recent they may be. Montanaro do not blow their trumpet enough about their expertise in ESG which, unlike some, has been an integral part of their investment process for many years. Only a well-resourced team makes this possible due to the patchy coverage of the smaller companies sector by ESG ratings specialists and the need for engagement with investee companies. The regular readers of MUSCIT's factsheet will have noticed that each month Montanaro report on the Trust's weighted average ESG score, which the team aims to see improve over time as their engagement efforts bear fruit.

Board

It has been a great privilege to have been on the Board since 2009 and Chairman since 2016. I will stand down following the conclusion of the AGM on 25 July 2019. The Board intends to appoint Arthur Copple to succeed me as Chairman. Arthur has specialised in the investment company sector for over 30 years. He was appointed to the Board in March 2017 and I am sure that his wise counsel and experience will serve the Company well.

MUSCIT has seen a great deal of change over the past decade. Montanaro have been proactive in removing the original performance fee and in reducing the annual management fee to a very reasonable 0.5% per annum.

Unfortunately, regulatory and compliance costs have continued to increase. The duplication involved in the wake of the Alternative Investment Fund Managers Directive and the introduction of the flawed Key Information Document does make one question the wisdom of such costly initiatives. In a further move to contain costs and in the light of the substantial experience of the existing directors, we have decided not to appoint another director at this time and the Board will consist of three going forward.

Outlook

The unwinding of quantitative easing, if continued, will inevitably reduce liquidity in financial markets. To some extent, this contributed to the unprecedented decline in nearly every asset class during calendar 2018. Trade war fears continue to resurface, as do concerns over excessive debt levels of countries, corporates and individuals. In the US, the yield curve is flirting with inversion; it is possible to achieve a greater return from 3-month than 10-year yields, which is viewed as a harbinger of recession.

Not unreasonably, investors are nervous. However, as mentioned in the Manager's Report, UK smaller companies have already suffered disproportionately and are attractively priced. Investors in MUSCIT can take comfort in the quality of the portfolio's underlying companies. As the uncertainties surrounding Brexit clear, we would expect to see renewed interest in the asset class. Our shareholders can look to the future with confidence.

ROGER CUMING

Chairman

17 June 2019

Manager's Report

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 smaller companies. Our team of 30 includes nine nationalities, which gives us the breadth and scope to conduct thorough in-house research.

At 31 March 2019, we were looking after over £2 billion of assets.

Investment Philosophy and Approach

We specialise in researching and investing in quoted smaller companies.

We have a disciplined, two-stage investment process. Firstly, we try to 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 Checklist and be approved by our Investment Committee before it can be added to the "Approved List". Only the most attractive companies make it on to the List and it is from these that we construct your Portfolio.

We have an in-house team of ten Analysts who are sector specialists. 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.

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. This helps us to predict where a company will be in 5 to 10 years. We are long term investors.

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.

In summary, we invest in well managed, high quality, growth 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.

It is worth noting that the change of dividend policy announced in

July 2018 has had no impact whatsoever on the investment philosophy, process or strategy. MUSCIT will always be a "Quality Growth" investment trust looking for capital growth by investing in the best managed smaller companies in the UK.

Environmental, Social and Governance ("ESG")

As part of our due diligence work, we place a great deal of emphasis on Ethical and ESG factors alongside fundamental attributes. 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 Environmental, Social and Corporate Governance 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 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. 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 MUSCIT has featured more regularly in the press over the last year. We are even on Twitter!

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

The Portfolio

At 31 March 2019, the portfolio consisted of 51 companies of which the top ten holdings represented 36%. MUSCIT held 16 companies traded on AIM, representing 25% 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

We are pleased to report a second consecutive year of outperformance. The NAV total return increased modestly by 0.5%, outperforming the benchmark by 1.7%. Compared to the Numis Smaller Companies Index including AIM, the outperformance was even greater at almost 5%.

Review

The first six months of the fiscal year proved positive for equity investors in developed markets. Solid economic data supported the robust outlook for global growth justifying a continuation of the now decade-old Bull Market. Even in the UK, where investors were stalked by the omnipresent shadow of Brexit, returns proved strong. It was little surprise that SmallCap underperformed LargeCap as investors continued to shun domestically exposed companies in favour of more international, export companies.

Yet volatility lurked close to the surface. As has often been the case in the past, October 2018 marked a shift in investor sentiment as worries about a global economic slowdown, rising interest rates and unpredictable politics took hold. Returns for 2018 were wiped out in a few weeks and many indices fell through the psychologically important 10% mark deemed a "correction". By Christmas 2018, UK SmallCap had fallen by some 14%.

The "see-saw" ride continued into the final quarter of the fiscal year as investors greeted 2019 with renewed optimism, a reminder that it often pays to remain invested during periods of short-term turbulence. This period proved especially strong for MUSCIT, which saw a 12% increase in the NAV total return.

Gearing

As Alternative Investment Fund Manager ("AIFM"), Montanaro, in consultation with the Board, is responsible for determining the net gearing level of the Company. Net gearing was reduced during the year falling to just 0.5% in October 2018, a fortuitously low level in light of the volatile final calendar quarter. This was subsequently increased from December 2018 reflecting a more positive outlook, rising to 6.2% at 31 March 2019. Fortunately, this proved to be well-timed as equity markets have performed strongly since the New Year.

Outlook

According to the Investment Association, the worst selling asset class among UK retail investors in 8 of the last 10 years has been the UK All Companies sector. Similarly, since the Global Financial Crisis, more than £2 billion has been withdrawn from UK smaller companies. We would expect this to reverse once there is more clarity about the impact of Brexit.

UK SmallCap valuations are well below their long-term average with the Price-to-Earnings ratio of the benchmark at 12.6x. This does not feel expensive. SmallCap is 5% cheaper than UK LargeCap and 20% cheaper than its European counterpart, close to an historic low. History suggests that now might not be a bad time for Sterling investors to address significant underweighting to the UK. We would not be surprised to see an increase in mergers and acquisition activity as overseas trade buyers take advantage of attractively valued UK companies made even more enticing by a weak pound.

We would like to thank the Board of MUSCIT as always for their support. This is a particularly poignant time as Roger Cuming will be standing down as Chairman at the forthcoming Annual General Meeting.

We have known Roger for more than two decades, both as an institutional investor in MUSCIT for many years and as a Director for the past ten years. As an investor, his breadth of knowledge of markets (at times esoteric) never failed to amaze and his investment skills remain remarkable. As Chairman, he has always given sound counsel and personal support that have been greatly appreciated. He will be missed. On your behalf, we would like to thank him.

We are only here thanks to our many investors. Some have been with us for more than two decades, voting for us to continue our efforts over numerous continuation votes. Thank you too for your support. Our interests are firmly aligned as we remain among the largest investors in MUSCIT. Almost in inverse proportion to the doom and gloom about Brexit, we are increasingly excited about the prospects for MUSCIT.

MONTANARO ASSET
MANAGEMENT LIMITED
17 June 2019

Breakdown by Market Cap (Ex Cash)

	2019	2018
£0 - £250m	6%	6%
£250m - £500 m	30%	16%
£500m - £1bn	30%	41%
£1bn - £1.5bn	16%	23%
>£1.5bn	19%	14%

Breakdown by Index (Ex Cash)

	2019	2018
AIM	25%	27%
FTSE 250*	20%%	16%
NSCI	55%	57%

Twenty Largest Holdings as at 31 March 2019

1. Marshalls plc

the UK's leading provider of landscaping products.

2. Entertainment One Ltd

a distributor of film, TV and music content.

3. 4imprint Group plc

a supplier of promotional merchandise.

4. Big Yellow Group plc

a real estate investment trust focused on the self-storage market.

5. Hilton Food Group plc

a leading meat packing business.

6. Diploma plc

a supplier of specialised, consumable products in seals, controls and healthcare across the globe.

7. Polypipe Group plc

a supplier of plastic pipes and ventilation systems for residential, commercial and infrastructure.

8. Integrafin Holdings plc
a UK IFA platform provider.

9. James Fisher and Sons plc

a marine services provider.

10. Cineworld Group plc

a leading cinema operator in the UK and US.

11. FDM Group Holdings plc

a specialist service business that trains and places IT professionals.

12. XP Power Ltd

a provider of power solutions.

13. Porvair plc

an industrial filtration and environmental technology specialist.

14. Ideagen plc

a supplier of Governance, Risk and Compliance software for highly regulated industries.

15. Cranswick plc

a supplier of premium meat products.

16. Consort Medical plc

medical device technologies for drug delivery.

17. Brewin Dolphin Holdings plc

a provider of investment management and wealth management services for private clients.

18. GB Group plc

a world leader in identity data intelligence.

19. Equiniti Group plc
a share registration and administration business.

20. Clarkson plc

a leading shipping brokerage business.

Twenty Largest Holdings as at 31 March 2019

Holding	Sector	Value £'000	Market cap £m	% of portfolio 31 March 2019	% of portfolio 31 March 2018
Marshalls	Construction and Materials	10,515	1,237	4.6	3.0
Entertainment One	Media	10,053	2,077	4.4	2.4
4imprint Group	Media	9,225	691	4.0	2.5
Big Yellow Group	Real Estate Investment Trusts	8,428	1,652	3.7	3.0
Hilton Food Group	Food Producers	7,838	775	3.4	2.9
Diploma	Support Services	7,290	1,651	3.2	2.5
Polypipe Group	Construction and Materials	6,650	805	2.9	2.2
Integrafin Holdings	General Financial	6,125	1,160	2.7	1.0
James Fisher and Sons	Industrial Transportation	5,928	993	2.6	1.9
Cineworld Group	Travel and Leisure	5,852	4,012	2.6	2.0
FDM Group	Software and Computer Services	5,844	973	2.5	2.6
XP Power	Electronic and Electrical Equipment	5,625	481	2.5	2.0
Porvair	Industrial Engineering	5,500	252	2.4	1.4
Ideagen	Software and Computer Services	5,475	321	2.4	-
Cranswick	Food Producers	5,444	1,407	2.4	2.7
Consort Medical	Health Care Equipment and Services	5,256	432	2.3	2.9
Brewin Dolphin Holdings	General Financial	5,229	885	2.3	2.4
GB Group	Software and Computer Services	4,895	944	2.1	1.7
Equiniti Group	Support Services	4,888	758	2.1	2.4
Clarkson	Industrial Transportation	4,750	720	2.1	2.6
Twenty Largest Holdings		130,810		57.2

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

All investments are in ordinary shares.

As at 31 March 2019, the Company did not hold any equity interests comprising more than 3% of any Company's share capital.

Analysis of Investment Portfolio by Industrial or Commercial Sector

as at 31 March 2019

	31 March 2019				31 March 2018
Sector	% of portfolio	% of NSCI		% of portfolio		% of NSCI
Oil and Gas Producers Oil Equipment, Services & Distribution Alternative Energy	- - -	3.6 1.1 0.0	- - -				2.8 1.2 -
Oil and Gas	-	4.7	-				4.0
Chemicals	2.8	2.5	2.1				2.1
Forestry & Paper	-	-	-				-
Industrial Metals	-	1.0	-				-
Mining	-	3.3	-				2.2
Basic Materials	2.8	6.8	2.1				4.3
Construction and Materials	7.4	4.8	5.2				4.9
Aerospace and Defence	-	1.9	-				2.9
General Industrials	-	1.0	-				0.9
Electronic and Electrical Equipment	5.9	1.8	5.7				2.0
Industrial Engineering	2.4	1.7	1.4				2.5
Industrial Transportation	4.7	2.3	4.4				2.3
Support Services	20.3	7.8	22.8				10.7
Industrials	40.7	21.3	39.5				26.2
Automobiles and Parts	-	0.6	-				0.8
Beverages	-	0.9	0.9				0.8
Food Producers	7.4	3.5	7.4				2.7
Household Goods	2.5	3.2	4.4				3.2
Leisure Goods	0.2	0.8	0.3				0.9
Personal Goods	-	1.3	-				1.4
Tobacco	-	-	-				-
Consumer Goods	10.1	10.3	13.0				9.8
Health Care, Equipment and Services	5.9	1.2	6.1				1.8
Pharmaceuticals and Biotechnology	3.1	1.5	6.1				1.9
Health Care	9.0	2.7	12.2				3.7
Food and Drug Retailers	-	1.3	-				1.0
General Retailers	1.3	6.4	2.6				5.2
Media	8.4	3.8	4.9				4.4
Travel and Leisure	3.5	9.8	3.8				7.7
Consumer Services	13.2	21.3	11.3				18.3
Fixed Line Telecommunications	-	1.9	-				1.7
Telecommunications	-	1.9	-				1.7
Electricity	-	0.8	-				0.8
Utilities	-	0.8	-				0.8
Banks	-	1.5	-				2.9
Non-life Insurance	-	2.3	-				2.2
Life Insurance	-	0.8	-				-
Real Estate Investment and Services	-	6.0	-				-
Real Estate Investment Trusts	4.8	5.0	6.6				11.5
General Financial	7.4	8.7	6.0				8.7
Equity Investment Instruments	-	-	-				-
Non-equity Investment Instruments	-	-	-				-
Financials	12.2	24.3	12.6				25.3
Software and Computer Services	12.0	5.1	9.3				4.6
Technology Hardware & Equipment	-	0.8	-				1.3
Technology	12.0	5.9	9.3				5.9
Total	100.0	100.0	100.0				100.0

The investment portfolio comprises 51 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 objectives 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 2019, this was any company below £1.33 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 Alternative Investment Fund Manager ("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 2019. Net gearing at that date amounted to 6.2%.

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%.

PRINCIPAL RISKS

The Board carefully considers the Company's principal 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 risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Cyber risk has been identified as having become a principal risk over the year under review, and the ways in which it is mitigated are included in the table.

A summary of the Company's risk management and internal control processes can be found in the Corporate Governance Statement contained within the Company's Annual Report for the year ended 31 March 2019. Details of the principal 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 become vulnerable to 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.

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 Board receives recommendations on gearing levels from the Manager, and monitors the appropriate level of gearing 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.

Montanaro 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.

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 & 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.

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	%
	2019³	2018³
NAV per share total return	0.5	9.0
Share price total return	(1.1)	12.0
Relative NAV¹ per share performance vs benchmark	1.7	3.8
Discount to NAV^1,2	18.0	17.5
Ongoing charges ratio	0.80	0.78

¹ London Stock Exchange closing price.

²The percentage difference between the share price and the NAV.

³ Returns for both 2018 and 2019 are Total Returns, i.e. including dividends reinvested.

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 2024.

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 in the Strategic Report. 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 64% 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 smaller 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 Company's Annual Report for the year ended 31 March 2019;

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

· the performance of the Company will be satisfactory.

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 contained within the Company's Annual Report for the year ended 31 March 2019.

ENVIRONMENTAL, HUMAN RIGHTS, EMPLOYEE, SOCIAL AND COMMUNITY ISSUES

The Company's core activities are undertaken by Montanaro which has implemented environmental management practices which are detailed on its website. As an investment trust, the Company has no direct social or community responsibilities. However, the Company believes that it is in shareholders' interests to consider human rights issues, environmental and social and governance factors when selecting and retaining investments. Further details are provided in the Manager's report contained within the Company's Annual Report for the year ended 31 March 2019.

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.

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 17 June 2019.

On behalf of the Board

ROGER CUMING

Chairman

17 June 2019

Related Party Transactions

The Company entered into a Management Agreement with Montanaro Asset Management Limited (the Manager) dated 19 June 2014 under which the Manager was appointed by the Company to act as the AIFM. Montanaro receives an ongoing fee of £50,000 per annum to act as the Company's AIFM.

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.

The Board contractually delegated the management of the investment portfolio to the Manager with effect from 19 June 2014. The Manager receives a monthly management fee equivalent to 1/12 of 0.50% (2018: 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 2019, £99,000 (2018: £113,000) was due for payment to the Manager.

The Board consists of four non-executive Directors, all of whom, the Board have determined are independent of the Manager. None of the Directors has a service contract with the Company. For the year ended 31 March 2019, 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 Senior Independent Director received an addition annual fee of £1,000.

The related party transactions with the Directors are set out in the Directors' Remuneration Report contained within the Company's Annual Report for the year ended 31 March 2019.

As at 31 March 2019 and 2018, the Directors' interests in the Company's Ordinary shares were as follows:

	As at 31 March 2019 No. of shares³	As at 1 April 2018 No. of shares
Roger Cuming	50,000	50,000
Kate Bolsover	8,345	8,345
Arthur Copple	125,000¹	75,000¹
James Robinson	40,000²	40,000²

2018 figures reflect the subsequent five for one share split.

1 Includes 25,000 shares held by Mrs Copple.

2 Held jointly by Mr and Mrs Robinson.

3 Due to the sub-division of shares of 19 July 2018, all Directors received five
shares for each share previously held.

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

ROGER CUMING

Chairman

17 June 2019

Income Statement

for the year to 31 March 2019

	Notes	Year to 31 March 2019 Revenue Capital Total £'000 £'000 £'000			Year to 31 March 2018 Revenue Capital Total £'000 £'000 £'000
(Losses)/gains on investments at fair value through
profit or loss	9	-	(5,762)	(5,762)	- 16,728		16,728
Dividends and interest	2	5,109	-	5,109	5,087	-	5,087
Management fee	3	(320)	(959)	(1,279)	(329)	(987)	(1,316)
Other expenses	4	(516)	-	(516)	(491)	-	(491)
Net (loss)/return before finance costs and taxation		4,273	(6,721)	(2,448)	4,267	15,741	20,008
Interest payable and similar charges	5	(148)	(441)	(589)	(148)	(443)	(591)
Net (loss)/return before taxation		4,125	(7,162)	(3,037)	4,119	15,298	19,417
Taxation	6	(7)	-	(7)	(7)	-	(7)
Net (loss)/return after taxation		4,118	(7,162)	(3,044)	4,112	15,298	19,410
(Loss)/return per Ordinary share: Basic and Diluted	8	2.46p	(4.28p)	(1.82p)	2.46p*	9.14p*	11.60p*

* 2018 figures restated to reflect share split.

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 form part of these financial statements.

Statement of Changes in Equity

for the year to 31 March 2019

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 split			-	-		-		-		(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

		Called-up share capital	Share premium account	Capital redemption reserve	Special reserve*	Capital reserve*	Distributable revenue reserve*	Total equity shareholders' funds
Year to 31 March 2018	Notes	£'000	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 March 2017		3,348	19,307	1,362	4,642	176,165	6,616	211,440
Total comprehensive income:
Fair value movement of investments	9	-	-	-	-	16,728	-	16,728
Costs allocated to capital		-	-	-	-	(1,430)	-	(1,430)
Net revenue for the year		-	-	-	-	-	4,112	4,112
		-	-	-	-	15,298	4,112	19,410
Dividends paid in the year	7	-	-	-	-	-	(3,515)	(3,515)
As at 31 March 2018		3,348	19,307	1,362	4,642	191,463	7,213	227,335

* 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 form part of these financial statements.

Balance Sheet

as at 31 March 2019

	Notes	31 March 2019 £'000 £'000		31 March 2018 £'000 £'000
Fixed assets Investments at fair value	9		229,476		233,470
Current assets Debtors Cash at bank	10	403 6,663		720 13,487
		7,066		14,207
Creditors: amounts falling due within one year Other creditors	11	(320)		(342)
		(320)		(342)
Net current assets			6,746		13,865
Total assets less current liabilities			236,222		247,335
Creditors: amounts falling due after more than one year Fixed rate term loan	12		(20,000)		(20,000)
Net assets			216,222		227,335
Share capital and reserves Called-up share capital Share premium account Capital redemption reserve Special reserve Capital reserve Distributable revenue reserve	13		3,348 19,307 1,362 4,642 184,267 3,296		3,348 19,307 1,362 4,642 191,463 7,213
Total equity shareholders' funds			216,222		227,335
Net asset value per Ordinary share: Basic and Diluted			129.18p		135.82p*

* 2018 figures restated to reflect the subsequent five for one share split.

These financial statements were approved and authorised for issue by the Board of Directors on 17 June 2019.

ROGER CUMING
Chairman

Company Registered Number: 3004101

The notes form part of these financial statements.

Notes to the Financial Statements

at 31 March 2019

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 Hamilton Centre, Rodney Way, Chelmsford, CM1 3BY.

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). Therefore, the financial statements have been prepared on the going concern basis.

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 other financial instruments, 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 amortised 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 2019 £'000				Year to 31 March 2018 £'000
Income from investments			5,109				5,079
UK dividend income			4,908				4,900
Overseas dividend income			201				179
Other income
Bank interest			-				8
Total income			5,109				5,087
Total income comprises
Dividends from financial assets designated at fair value through profit or loss			5,109				5,079
Interest from financial assets designated at fair value through profit or loss			-				8
Dividends and interest			5,109				5,087
3 Management fee
		Year to 31 March 2019				Year to 31 March 2018
	Revenue	Capital		Total	Revenue	Capital		Total
	£'000	£'000		£'000	£'000	£'000		£'000
Management fee	307	922		1,229	316	950		1,266
AIFMD fee	13	37		50	13	37		50
	320	959		1,279	329	987		1,316

The Manager received a monthly management fee equivalent to 1/12 of 0.50% (2018: 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 2019, £99,000 (2018: £113,000) was due for payment to the Manager.

4 Other Expenses	Year to 31 March 2019 £'000	Year to 31 March 2018 £'000
Administration	72	72
Company secretarial fees (Maitland)	36	36
Directors' fees†	103	101
Depositary fee	75	76
Registrar fee	39	35
Auditor's remuneration for:
- audit	23	23
Custody and other bank charges	21	21
Legal fees	6	5
Other expenses (including VAT)	141	122
	516	491

† A breakdown of the Directors' remuneration is set out in the Directors' Remuneration report contained within the Company's Annual Report for the year ended 31 March 2019.
The Company has no employees.

5 Interest Payable and Similar Charges

Financial liabilities	Revenue £'000	Year to 31 March 2019 Capital £'000	Total £'000	Revenue £'000	Year to 31 March 2018 Capital £'000	Total £'000
Interest payable on loan Loan commitment fee	134 14	402 41	536 55	134 14	402 41	536 55
	148	443	591	148	443	591
6 Taxation

Analysis of charge in year

Financial liabilities

Revenue

£'000

Year to 31 March 2019

Capital

£'000

Total

£'000

Revenue

£'000

Year to 31 March 2018

Capital

£'000

Total

£'000

Current tax:

Overseas tax suffered

The taxation charge for the year is different from the standard rate of Corporation Tax in the UK of 19% (2018: 19%). The differences are explained below.

	Revenue £'000	Year to 31 March 2019 Capital £'000	Total £'000	Revenue £'000	Year to 31 March 2018 Capital £'000	Total £'000
Net (loss)/return before taxation	4,125	(7,162)	(3,037)	4,119	15,298	19,417
Theoretical tax at UK corporation tax rate of 19%	784	(1,367)	(583)	783	2,907	3,690
(2018: 19%)
Effects of:
- UK dividends that are not taxable	(878)	-	(878)	(883)	-	(883)
- Foreign dividends that are not taxable	(38)	-	(38)	(34)	-	(34)
- Non-taxable investment losses/(gains)	-	1,095	1,095	-	(3,178)	(3,178)
- Irrecoverable overseas tax	7	-	7	7	-	7
- Disallowed expenses	-	6	6	-	-	-
- Unrelieved excess expenses	132	266	398	134	271	405
Taxation charge for the year	7	-	7	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 2019, based on current estimates and including the accumulation of net allowable losses, the Company had unrelieved losses of £45,562,000 (2018: £43,465,000) that are available to offset future taxable revenue. A deferred tax asset of £7,745,000 (2018: £7,389,000) 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 2019 £'000	Year to 31 March 2018 £'000
In respect of the previous period: Paid 2018 Final dividend of 2.2p* (2017: 2.1p*) per Ordinary share	3,682	3,515
In respect of the year under review: Paid 2019 Second quarter dividend of 1.43p per Ordinary share	2,394	-
Paid 2019 Third quarter dividend of 1.17p per Ordinary share	1,958	-
Dividends distributed during the year	8,034	3,515
Declared: 2019 Fourth quarter dividend of 1.29p (2018: final dividend of 2.2p*) per Ordinary share	2,159	3,682

* 2017 and 2018 figures restated to reflect the subsequent five for one share split.

On 25 July 2018 the Board of MUSCIT announced a revised dividend policy and, effective from the quarter ended 30 September 2018, its intention is to pay regular quarterly dividends. In accordance with the revised policy quarterly dividends will:

− be 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;

− be paid in May, August, November and February each year; and

− be funded out of capital reserves to the extent that current year revenue and revenue reserves are insufficient.

The first dividend distribution paid under the revised dividend policy, and following the five for one share split, of 1.43 pence per share was declared on 19 October 2018, and paid on 23 November 2018. The record date was 2 November 2018.

The second dividend distribution of 1.17 pence per ordinary share in respect of the third quarter of the financial year ended 31 March 2019 was paid on 22 February 2019 to shareholders on the register at the close of business on 1 February 2019.

The third dividend distribution of 1.29 pence per ordinary share in respect of the fourth quarter of the financial year ended 31 March 2019 was paid on 24 May 2019 to shareholders on the register at the close of business on 26 April 2019.

8 (Loss)/return per Ordinary Share

Revenue

Year to 31 March 2019

Capital

Total

Revenue

Year to 31 March 2018

Capital

Total

Ordinary share

2.46p

(4.28p)

(1.82p)

2.46p

9.14p

11.60p

Revenue return per Ordinary share is based on the net revenue after taxation of £4,118,000 (2018: £4,112,000) and

167,379,790 (2018: 167,379,790)* Ordinary shares, being the weighted average number of Ordinary shares, excluding any shares

held in treasury.

Capital (loss)/return per Ordinary share is based on net capital (losses)/gains for the year of £(7,164,000) (2018: £15,298,000), and on 167,379,790 (2018: 167,379,790)* Ordinary shares, being the weighted average number of Ordinary shares, excluding any shares held in treasury.

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

* 2018 figures restated to reflect the subsequent five for one share split.

9 Investments	Year to 31 March 2019 £'000			Year to 31 March 2018 £'000
Total investments at fair value	229,476			233,470

The investment portfolio comprises 51 (2018: 55) traded and listed UK equity holdings.
		Year to	Year to
		31 March 2019	31 March 2018
		£'000	£'000
Opening book cost		172,541	157,446
Opening investment holding gains		60,929	60,029
Opening valuation		233,470	217,475
Movements in the year
Purchases at cost		47,809	63,925
Sales - proceeds		(46,041)	(64,658)
- realised gains on sales		14,720	15,828
(Decrease)/increase in investment holding gains		(20,482)	900
Closing valuation		229,476	233,470
Closing book cost		189,029	172,541
Closing investment holding gains		40,447	60,929
		229,476	233,470

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.

	31 March 2019			31 March 2018
	Level 1 £'000	Level 2 £'000	Total £'000	Level 1 £'000	Level 2 £'000	Total £'000
Equity investments	229,476	-	229,476	233,470	-	233,470
	229,476	-	229,476	233,470	-	233,470

There were no level 2 or 3 investments.

TRANSACTION COSTS

During the year, the Company incurred transaction costs of £142,000 (2018: £179,000) and £27,000 (2018: £51,000) 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 2019	31 March 2018
	£'000	£'000
Net gains on investments at fair value	14,720	15,828
Gains on sales	(20,482)	900
Changes in fair value	(5,762)	16,728

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 within the Company's Annual Report for the year ended 31 March 2019.

10 Debtors

	Year to	Year to
	31 March 2019	31 March 2018
	£'000	£'000
Prepayments and accrued income	55	67
Dividends receivable	348	653
	403	720

11 Other Creditors

	Year to	Year to
	31 March 2019	31 March 2018
	£'000	£'000
Accruals	320	342
	320	342

12 Fixed Rate Term and Floating Rate Revolving Credit Facilities

	Year to	Year to
	31 March 2019	31 March 2018
	£'000	£'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 2019 and 31 March 2018. 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 2019 and 31 March 2018. 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 net asset value, 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 2019	31 March 2018
	£'000	£'000
Allotted, called-up and fully paid:
167,379,790 (2018: 33,475,958)* Ordinary shares of 2p each (2018: Ordinary shares of 10p each)	3,348	3,348

* 2018 figure stated prior to the five for one share split.

At the Annual General Meeting of the Company held on 18 July 2018, shareholders approved a resolution for a five for one share split such that each shareholder would receive five shares with a nominal value of 2 pence each for every one share held. These new shares were listed on 20 July 2018. Expenses associated with the share split amount to £34,000 and have been taken to the capital reserve and shown in the Statement of Changes in Equity.

Treasury shares

At the AGM on 18 July 2018, 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.

During the year, no shares were purchased.

There were no shares held in treasury at any time during the year (2018: nil) and no shares purchased during the year (2018: nil).

14 Net Asset Value per Ordinary Share

Net asset value per Ordinary share is based on net assets of £216,222,000 (2018: £227,335,000) and on 167,379,790 (2018: 167,379,790)* Ordinary shares, being the number of Ordinary shares in issue at the year-end.

* 2018 figures restated to reflect the subsequent five for one share split.

15 Analysis of Financial Assets and Liabilities

Investment Objective and Policy

The Company's investment objective and policy are detailed within the Company's Annual Report for the year ended 31 March 2019.

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 £229,476,000 (2018: £233,470,000).

If the investment portfolio valuation fell by 1% from the amount detailed in the financial statements as at 31 March 2019, it would have the effect, with all other variables held constant, of reducing the net capital return before taxation by £2,295,000 (2018: £2,335,000). An increase of 1% 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

Although the Company's performance is measured in Sterling, a proportion of the Company's assets may be either denominated in other currencies or in investments with currency exposure. 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 (2018: £8,000).

If interest rates had reduced by 1% from those paid as at 31 March 2019, 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 (2018: £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 (2018: £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 smaller 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. A maturity analysis is not presented as the Manager does not consider this to be a material risk.

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 2019 was:
	31 March 2019	31 March 2018
	£'000	£'000
Cash at bank (held at Bank of New York Mellon)	6,663	13,487
Debtors and prepayments	403	720
	7,066	14,207
None of the Company's assets are part due or impaired.

Gearing

Gearing can have amplified effects on the net asset value 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 within the Company's Annual Report for the year ended 31 March 2019. 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 2019 (31 March 2018: £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 2019 was as follows:

	Total	Weighted average interest rate	Period until maturity
	£'000	%	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 interest rate risk profile of the financial liabilities of the Company as at 31 March 2018 was as follows:

	Total	Weighted average interest rate		Period until maturity
	£'000	%		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	342	-		-
The maturity profile of the Company's financial liabilities is as follows:
			31 March 2019		31 March 2018
			£'000		£'000
In three months or less			418		427
In more than three months but not more than one year			437		450
In more than one year but not more than three years			20,919		1,072
In more than three years but not more than five years			-		20,386
			21,774		22,335

16 Capital Management Policies

The structure of the Company's capital is noted in the Statement of Changes in Equity and managed in accordance with the Investment Policies and Objectives.

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 smaller companies;

· 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 ad 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 2019, there were no capital commitments or contingent liabilities (2018: 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.

The related party transactions with the Directors are set out in the Directors' Remuneration Report contained within the Company's Annual Report for the year ended 31 March 2019.

19 Post Balance Sheet Event

On 25 April 2019, £10 million was drawn down under the Floating Rate Revolving Credit Facility of which £7.5 million was subsequently repaid on 29 May 2019. Total borrowing as at 14 June 2019 was £22.5 million.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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