Montanaro European Smaller Companies Trust plc (the "Company'')

LEI: 213800CWSC5B8BG3RS21

Financial Results

RESULTS FOR THE YEAR ENDED 31 MARCH 2019

The Directors are pleased to present the Annual Financial Results of the Company for the year ended 31 March 2019.

The information set out below does not constitute the Company's statutory accounts for the year ended 31 March 2019 but is derived from those accounts. Statutory accounts for the year ended 31 March 2019 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.

Investment objective

Montanaro European Smaller Companies Trust plc is to achieve capital growth by investing principally in Continental European quoted smaller companies.

Highlights

Chairman's Statement

Results

The year to 31 March 2019 was turbulent for investors in European smaller companies: the MSCI Europe SmallCap (ex UK) Index (in sterling terms) declined by -6.3%. In comparison, the net asset value ('NAV') of your Company rose by 12.2% to 1,010.8p per share. In total return terms, the NAV per share rose by 13.1%. The share price rose by 11.3% to 890.0p as the discount widened from 11.2% to 12.0%.

I am delighted with the excellent investment performance delivered by our manager over the year, not only relative to the benchmark but also relative to all the other European SmallCap - and indeed LargeCap - investment trusts. Definitely a vintage year. I would also point out that your Company is now the best performing European investment trust over 3 years and 5 years.

Over the course of the year most European currencies, with the exception of the Swiss Franc, declined slightly against Sterling. This will have resulted in a small reduction in the net asset value. We do not hedge currencies.

Since the appointment of Montanaro Asset Management Limited ('Montanaro') in September 2006, the NAV per share has increased by 192.7% compared with an increase of 118.7% in the benchmark index. A review of the market, investment approach and a further analysis of performance is set out in the Manager's Report together with more detail on some of the businesses in which the Company is invested.

Earnings and Dividends

Revenue earnings per share for the year were 9.5p (2018: 9.5p).

The Company's primary aim is to deliver capital growth to its shareholders. However, our substantial revenue reserve combined with the long-term growth in dividends of the companies in which we invest, have allowed us to maintain a consistent and robust dividend payout. An interim dividend of 1.75p per share was paid on 4 January 2019. The Board recommends the payment of a final dividend of 7.25p per share payable on 17 September 2019 to shareholders on the register on 16 August 2019. Subject to shareholder approval, this would bring the total dividends for the year to 9.00p per share, an increase of 5.9% compared to the previous year.

Directors

After 26 years on the Board and 14 years as Chairman, Andy Irvine retired following the conclusion of the Annual General Meeting on 29 August 2018. I was honoured to accept the Board's invitation to become Chairman. Andy has been a truly exceptional Chairman for the Company and its shareholders and I would like to thank him for his dedication and service. Bruce Graham and Alex Hammond-Chambers also retired following the 2018 Annual General Meeting. I would also like to thank Bruce and Alex for their outstanding contribution, sound advice and commitment to the Company over many years. The Board continues to keep under review the appropriate size of the Board.

Administrator and Company Secretary

On 1 April 2019, the Company appointed Link Company Matters Limited and Link Alternative Fund Administrators Limited as Company Secretary and Administrator respectively, in place of BMO Investment Business Limited (formerly F&C Investment Business Limited) ("BIB"). I would like to thank the staff at BIB for their excellent service over the years that they have worked with the Company and its Board.

Borrowings

The Board, in discussion with the Manager, regularly reviews the gearing strategy of the Company and approves the arrangement of any gearing facility. Gearing increases or decreases the returns from underlying profits or losses generated by the investment portfolio. This is a key feature of investment trusts that we believe offers a strong competitive advantage over open-ended investment funds. Therefore, the Board encourages the active use of gearing by the Manager in both a strategic and tactical way whilst remaining cognisant of the risks that this may involve.

The Board has set a maximum limit on borrowing, net of cash, of 30% of shareholders' funds at the time of borrowing. At the end of the fiscal year, the Company had borrowings, net of cash, of 0.4% compared to 0.6% at the beginning of the year. The low level of gearing gives the Manager plenty of flexibility to invest more as and when they consider the conditions are right. During the year, the Company renewed its borrowing facility arrangements.

The Company currently has borrowing facilities in the form of a fixed rate loan of €10 million and a revolving loan facility of €15 million, both of which are due to mature on 13 September 2023. The Board believes that the combination of these facilities gives the Company greater flexibility in pursuit of its investment objective.

Treasury Shares

During the year, the Company did not buy back shares into or sell shares from Treasury. The Board's stated Treasury shares policy is included in the Annual Report and Accounts. The Board will seek to renew the Company's share buyback and share issuance authorities at the forthcoming Annual General Meeting.

Annual General Meeting

The Annual General Meeting will be held on 12 September 2019 at 12.30pm at the offices of Montanaro Asset Management, 53 Threadneedle Street, London EC2R 8AR. Shareholders are encouraged to attend the Meeting where there will be an opportunity to meet and ask questions of the Board and the Manager over a coffee.

Outlook

We continue to believe that the fundamentals behind the market remain positive. Global economies are still growing and monetary policy remains accommodative. However, leading indicators of global growth have generally weakened over the last year and it remains to be seen whether these deteriorate further or rebound in the next 12 months. Brexit and the increased risk of global trade wars also add to the uncertainty. We do not attempt to time such market shifts, preferring to invest in companies that can thrive irrespective of the economic cycle.

Your portfolio consists of some of the highest quality, quoted companies in Europe. Their strong management teams, good growth prospects, sound balance sheets and cash generative business models should ensure that long-term returns will remain attractive for investors.

R M CURLING

Chairman

18 June 2019

Managers Report                                             

The Attractions of Quoted European Smaller 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 64 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 £961 whereas the same £1 invested in smaller companies would now be worth £6,420 - six times more.

We have less comprehensive data on Europe - it only goes back to 2000. But this suggests that the SmallCap Effect is even more pronounced on the Continent: as the chart above illustrates, European "small" companies have outperformed by over 6.6% per annum.

The market for European smaller companies is inefficient. While some large companies are analysed by more than 50 brokers, many smaller companies in Europe 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 smaller companies. We have a particular focus on those with a market value below €5 billion.

At 31 March 2019, Montanaro's assets under management were over €2 billion.

Investment Process

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 4,000 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 business (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 - 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. We will get things wrong.

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.

Environmental, Social & Governance

As responsible Shareholders, we believe that it is our duty to engage with investee companies in an effort to improve corporate behaviour.

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.

Portfolio Construction

As discussed above, the portfolio is constructed by selecting stocks from our Approved List. We believe the best form of risk management is investing in fundamentally good and growing businesses. We also have a number of internal risk controls aimed at limiting our exposure to any individual company and ensuring liquidity is adequate for us to enter and exit a position if required.

We will generally hold between 45 and 55 companies in the portfolio. This means that our performance relative to the benchmark index can fluctuate. However, over the long term, our fundamental, research-driven investment approach has delivered attractive absolute and relative returns. We see no reason why this should change.

Country and sector distribution within the portfolio is driven by stock selection. Overweight and underweight positions are based on where the greatest value is perceived to be. We do not try to position the portfolio based on economic or political forecasts. Geographical and sector weightings are monitored and risk limits applied to ensure that your portfolio is not overly concentrated towards one specific macroeconomic outcome.

Our bottom-up, quality focused approach and aversion to macroeconomic predictions also tends to mean we have different weightings to certain sub-sectors compared to the index. For example, we do not invest in any commercial banks or mining companies but we are significantly overweight in healthcare and information technology.

More broadly, our investment approach does lead us to be continually overweight in higher quality and growth companies. There are times when lower quality, "value" companies outperform and we will usually perform less well than the overall smaller companies market during such periods.

Performance Attribution

The year to 31 March 2019 again saw some strong performances from our largest contributors. MTU Aero Engines, which develops, manufactures, maintains and repairs aircraft engines, was the biggest single contributor to performance thanks to the company posting record results and occupying a significant weighting in the portfolio throughout the year. Sartorius Stedim, the developer of equipment used to manufacture biologic drugs, again delivered excellent financial results which were duly reflected in the share price.

While both of these companies have been in your portfolio for years now, some of the newer names also did particularly well. MIPS sells a patented insert for recreational helmets which protects against rotational motion. The company was added to your portfolio during the year and subsequently rose by more than 90% as the business delivered extremely strong growth in revenues and profits. Likewise last year we mentioned the addition of Fortnox, which provides cloud-based accounting systems to companies in Sweden. This company also delivered exceptional growth and profitability and was rewarded with a share price that rose by more than 80% in the period.

Our largest detractor was Krones, a developer of bottling solutions for drinks manufacturers. While the company grew its orders, revenues and cash flows during 2018, profitability declined due to higher raw material costs combined with reorganisation and acquisition expenses. The company has raised prices in response to these pressures and we continue to monitor their progress closely.

Melexis, which develops sensors primarily for automotive applications, declined as global trade tensions led to customer inventory corrections. We expect these will prove temporary and believe that the structural growth case is intact, hence we added to our position as the share price weakened in the final quarter of 2018.

Portfolio Changes

We try to keep portfolio turnover as low as possible. Nonetheless, we typically make a few changes each year as we find new ideas that we believe will provide stronger long term returns than existing holdings. Companies that become too large, get acquired or whose investment case deteriorates are also replaced with new stocks from our Approved List.

In the year to 31 March 2019, we exited positions in companies including AF Group, the consulting and engineering company, after the company announced it would pay a substantial premium to purchase one of its peers. We are wary of companies that embark on such "strategic" M&A and believe it often ends badly. It is also a departure from the smaller bolt-on approach the company took historically - hence we sold the shares. Probi, which sells probiotics, was sold after significant changes in management and because we felt the valuation was too high given our expectations for the medium term future of the company. Comet Holding, the developer of components based on x-ray, radio frequency and electron beam technology, was sold as we felt the x-ray business was under-invested and the company began to change the strategic direction of the e-beam business.

New additions to the portfolio included MIPS (see above); NCAB, a full service supplier of printed circuit boards; and Esker, which develops document processing automation solutions.

At 31 March 2019, the portfolio consisted of 55 companies of which the top ten holdings represented 29% of the total by value.

Gearing

The Board determines levels of gearing following recommendation from the Manager. The Company ended the fiscal year with gearing of 0.4% (31 March 2018: 0.6%). The low level of gearing held throughout the year was due to our cautious approach towards valuations and what we felt was excessively positive general sentiment. The market correction between September and December 2018 has improved this situation and we are finding attractive investment ideas for which we now have plenty of cash ready to invest.

MONTANARO ASSET MANAGEMENT LIMITED

18 June 2019

Statement of Comprehensive Income (audited)

for the year ended 31 March 2019

Balance Sheet (audited)

As at 31 March 2019

Statement of Changes in Equity (audited)

for the year ended 31 March 2019

                                                                                                       Share                 Capital                                 

                                                                            Share              Premium       Redemption                Capital               Revenue

                                                                           Capital               Account               Reserve              Reserve               Reserve                  Total

                                                                                               Share                  Capital                                        

                                                                            Share              Premium       Redemption                Capital               Revenue

                                                                           Capital               Account               Reserve              Reserve               Reserve                  Total

Principal Risks and Uncertainties and Risk Mitigation

In accordance with the UK Corporate Governance Code, the Board has an established process for identifying, evaluating and managing the significant risks faced by the Company. The Board carefully considers the Company's principal and emerging risks and seeks to mitigate these risks through continued and regular review, policy setting, compliance with and enforcement of contractual obligations and active communication with the Manager, the Administrator and shareholders.

Most of the principal and emerging risks that could threaten the Company's objective, strategy, future returns and solvency are market related and comparable to those of other investment trusts investing primarily in quoted securities.

In accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, issued by the Financial Reporting Council, the Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. It has also regularly reviewed the effectiveness of the Company's risk management and internal control systems for the period.

The principal risks and uncertainties faced by the Company, and the Board's mitigation approach are described below.

Investment and strategic risk. Inappropriate strategy, including country and sector allocation and stock selection could lead to poor returns for shareholders.

Mitigation: At each Board Meeting, the Manager discusses portfolio performance and strategy with the Directors and performance against the benchmark and the peer group is reviewed. The Manager also provides the Board with monthly reports. The portfolio is well diversified with typically 45-55 holdings, thereby reducing stock-specific risk. The Board formally reviews the performance of the Manager and its terms of appointment annually.

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.

Mitigation: The Board is responsible for setting the gearing range within which the Manager may operate and has set a maximum limit on borrowing, net of cash, of 30% of shareholders' funds at the time of borrowing. The Company currently has borrowing facilities of €25 million that mature in September 2023. As at 31 March 2019, €10 million was drawn down from these facilities.

The Board receives recommendations on gearing levels from the Manager, and monitors and discusses with the Manager the appropriate level of gearing at each Board Meeting.

Other financial risks. The Company invests principally in Continental European quoted smaller companies and its principal risks are therefore market related with short term risk arising from the volatility in the prices of the Company's investments and foreign exchange. Events such as terrorism, disease, protectionism, inflation or deflation, changes in regulation and taxation, excessive stock market speculation, economic recessions, political instability and movements in interest rates and exchange rates could affect share prices in particular markets.

As with all small company investment trusts, there is liquidity risk at times when the liquidity of the underlying portfolio is poor, such as when smaller companies are out of favour or during periods of adverse financial conditions. The portfolio is focused on investments in smaller European companies where the opportunities may be more attractive than in larger companies but where overall portfolio liquidity may be more challenging. This may result in difficulties in buying or selling individual holdings in difficult markets. In addition, illiquid stock markets may impact the discount of the Company's share price to the NAV per share.

Mitigation: Portfolio diversification, both geographical and sectoral, can mitigate the consequences of such risky events and the Board reviews the portfolio with the Manager on a regular basis. However, it is not the Company's policy to hedge currency risk. The Board has also set investment restrictions and guidelines which are adhered to and reported on by the Manager. If required, it is also possible to raise the level of cash held, thereby reducing the risk of declining share prices and the effect of gearing on lower portfolio valuations. However, the portfolio's liquidity is not managed on the basis of timing short-term market fluctuations.

One of the benefits of an investment trust is that the Manager is rarely forced to buy or sell individual holdings at inopportune times. The Manager constantly reviews the underlying liquidity of the portfolio, which is well diversified, and deals with a wide range of brokers to enhance its ability to execute and minimise liquidity risk.

Discount volatility. As with all small company investment trusts, discounts can fluctuate significantly both in absolute terms and relative to their peer group.

Mitigation: The Board and Manager actively monitor the discount of share price to NAV per share and seek to influence this through liaising closely with the Company's Broker, share buybacks and effective marketing. The Board has stated its commitment to an active discount management policy, such that it will consider a buyback of shares where the discount of the share price to the NAV per share is greater than 10% for a sustained period of time and is significantly wider than the average for similar trusts. Any such transaction must be value enhancing for shareholders and the Board will take into consideration the effect of the buyback on the liquidity of the Company's shares. The Board encourages the Manager to market the Company to new investors to increase demand for the Company's shares, which may help to reduce the discount.

Regulatory. The Company carries on business as an investment trust and has been approved as such by HM Revenue & Customs subject to it continuing to meet eligibility conditions and ongoing requirements. As a result, it is not liable to corporation tax on capital gains. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on chargeable gains.

Breach of regulatory rules could also lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.

Mitigation: The Administrator monitors the Company's compliance with Section 1158 of the Corporation Tax Act 2010 including revenue forecasts and the amount of proposed dividends to ensure the rules are not breached. The results are reported to the Board at each meeting.

The Administrator monitors compliance with the Listing Rules of the UK Listing Authority and compliance with the principal rules is reviewed by the Directors at each Board Meeting.

The Board and AIFM also monitor changes in legislation which may have an impact on the Company.

Operational. In common with most other investment trust companies, the Company has no employees. The Company is therefore reliant on the services provided by third parties such as the Manager, the Administrator and the Custodian (as a delegate of the Depositary). Disruption or failure of the Manager's or Administrator's systems, or those of other third-party service providers could lead to an inability to provide accurate reporting and monitoring of the Company's financial position or a breach of regulatory and legal regulations.

Mitigation: The Board and the Audit Committee receive regular reports on the operation of internal controls to mitigate against the risk of failure, including those at the Manager, the Administrator and the Custodian as explained in more detail within Risk Management and Internal Control in the full annual report and accounts. These have been tested and monitored throughout the year which is evidenced from their control reports regarding their internal controls which are reported on by their reporting accountants. Quarterly reports are also received from the Depositary which is responsible for the safekeeping of all custodial assets of the Company. Prior to the appointment of the new administrator, a period of transition and hand over was undertaken between BIB and Link to ensure the seamless transfer of accounting data and administration information. Control reports have also been received from Link and considered by the Board and Audit Committee.

Manager. Should the Manager not be in a position to continue to manage the Company, performance may be impacted

Mitigation: Montanaro has one of the largest specialist teams in the UK focusing on quoted European smaller companies. Montanaro operates a team approach in the management of the investment portfolio which mitigates against the impact of the departure of any one member of the investment team. The Manager keeps the Board informed of developments within its business.

Viability Assessment and Statement

In accordance with the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over the coming three years in order to assess the viability of the Company, the Board is required to assess its future prospects and has considered that a number of characteristics of its business model and strategy were relevant to this assessment:

·      The Company's objective is to achieve capital growth.

·      The Company's investment policy, which is subject to regular Board monitoring, means that the Company is invested principally in the securities of Continental European quoted smaller companies.

·      The Company is a closed-end investment trust, whose shares are not subject to redemptions by shareholders.

·      The Company's business model and strategy is not time limited.

Also relevant were a number of aspects of the Company's operational arrangements:

·       The Company retains title to all assets held by the Custodian under the terms of a formal agreement with the Depositary and Custodian.

·       The borrowing facilities, which remain available until September 2023, are also subject to formal agreements, including financial covenants with which the Company complied in full during the year.

·       Revenue and expenditure forecasts are reviewed by the Directors at each Board Meeting.

In considering the viability of the Company, the Directors carried out a robust assessment of the principal risks and uncertainties which could threaten the Company's objective and strategy, future performance and solvency, including the impact of a significant fall in equity markets or adverse currency movements on the Company's investment portfolio. These risks, their mitigations and the processes for monitoring them are set out above in Principal Risks and Uncertainties and Risk Mitigation, in the full annual report and accounts.

The Directors have also considered:

·    The level of ongoing charges incurred by the Company which are modest and predictable and that these were covered approximately 1.6 times by investment income and total 1.2% of average net assets;

·    Future revenue and expenditure projections;

·    The Company's borrowing in the form of a secured fixed rate 5 year loan facility of €10 million, which is due to mature in September 2023, noting that the Company has a large margin of safety over the covenants on this debt. This loan was covered 21 times by the Company's total assets at 31 March 2019. The Company also has a €15 million secured revolving loan facility which also matures in September 2023. As at 31 March 2019, no amounts were drawn under this facility;

·    Its ability to meet liquidity requirements given the Company's investment portfolio consists principally of Continental European quoted smaller companies which can be realised if required. It is estimated that approximately 93% of the portfolio could be liquidated under normal conditions within seven trading days;

·    The ability to undertake share buybacks if required;

·    That the Company's objective and investment policy continue to be relevant to investors; and

·    The Company has no employees, having only non-executive Directors and consequently does not have redundancy or other employment related liabilities (including pensions) or responsibilities.

These matters were assessed over a three year period to June 2022, and the Board will continue to assess viability over three year rolling periods, taking account of severe but plausible scenarios. In the absence of any adverse change to the regulatory environment and to the treatment of UK investment trusts a rolling three year period represents the horizon over which the Directors do not expect there to be any significant change to the Company's principal risks or their mitigation and they believe they can form a reasonable expectation of the Company's prospects.

Based on their assessment, and in the context of the Company's business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period to June 2022. For this reason, the Board also considers it appropriate to continue adopting the going concern basis in preparing the Report and Accounts.

Directors' Responsibilities Statement in Relation to the Financial Statements

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards as adopted by the European Union. The Directors are also required to prepare a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement.

Under company law, the Directors must not approve the financial statements unless they are satisfied that they present a fair, balanced and understandable report and provide the information necessary for shareholders to assess the Company's performance, business model and strategy. In preparing the financial statements, the Directors are required to:

· select suitable accounting policies in accordance with IAS 8: 'Accounting Policies, Changes in Accounting Estimates and Errors' and then apply them consistently;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance;

· state that the Company has complied with IFRS, subject to any material departures disclosed and explained in the financial statements;

· make judgements and estimates that are reasonable and prudent; and

· prepare the financial statements on a going concern basis unless it is inappropriate to assume 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 are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Responsibility Statements under the Disclosure Guidance and Transparency Rules

Each of the Directors confirms that to the best of his or her knowledge:

· the financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

· the Strategic Report (comprising the Chairman's Statement, Manager's Report, Twenty Largest Holdings, Analysis of Investment Portfolio by Sector and Business Model and Strategy) and the Report of the Directors include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces;

· taken as a whole, the Annual Report and financial statements are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy;

· the financial statements include details on related party transactions; and

· having assessed the principal risks and other matters discussed in connection with the Viability Statement, it is appropriate to adopt the going concern basis in preparing the financial statements.

The Annual Report and Accounts were approved by the Board and the above responsibility statement was signed on its behalf by:

R M CURLING
Director

18 June 2019

Notes:

1. Accounting Policies

The financial statements of the Company have been prepared in accordance with the Companies Act 2006, International Financial Reporting Standards ('IFRS'), which comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee ('IASC') that remain in effect and to the extent that they have been adopted by the European Union.

Where presentational guidance set out in the Statement of Recommended Practice ('SORP') for investment companies issued by the Association of Investment Companies ('AIC') is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

The accounting policies adopted are consistent with those of the previous financial year, except that the following amendments to IFRS 9 and IFRS 15 have been adopted in the current year:

IFRS 9 Financial Instruments

In the current period the Company has adopted IFRS 9 Financial Instruments on its effective date of 1 January 2018. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and introduces new requirements for classification and measurement, impairment and hedge accounting. IFRS 9 is not applicable to items that have already been derecognised at 1 January 2018, the date of initial application.

Receivables that were previously measured at amortised cost under IAS 39 are held to collect contractual cash flows and give rise to cash flows representing solely payments of principal and interest. Therefore, such instruments continue to be measured at amortised cost under IFRS 9.

The classification of financial liabilities under IFRS 9 remains broadly the same as under IAS 39. The main impact on measurement from the classification of liabilities under IFRS 9 relates to the element of gains or losses for financial liabilities designated at fair value through profit or loss attributable to changes in credit risk. The Company has not designated any financial liabilities at fair value through profit or loss therefore this requirement has not had an impact on the Company.

IFRS 9 requires the Company to record expected credit losses on all of its receivables, either on a 12 month or lifetime basis. As the Company has limited exposure to credit risk, this amendment has not had a material impact on the financial statements as the Company only holds receivables with no financing component that have maturities of 12 months or less. This requirement has not significantly changed the carrying amounts of the Company's financial assets under IFRS 9.

2. Return per Ordinary Share is based on a weighted average of 16,733,260 Ordinary Shares in issue during the year (2018: 16,733,260).

3. The proposed final dividend of 7.25p per Ordinary Share, will be paid on 17 September 2019 to ordinary shareholders on the register at close of business on 16 August 2019.

4. Excluding shares held in treasury there were 16,733,260 Ordinary Shares in issue at 31 March 2019 (2018: 16,733,260).

5. Financial Instruments

The Company's financial instruments comprise its investment portfolio, cash balances, bank loans, and debtors and creditors that arise directly from its operations. As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company makes use of borrowings, as detailed in note 12 and the Chairman's Statement, to achieve improved performance in rising markets. The downside risk of borrowings may be reduced by raising the level of cash balances held.

The Company's principal risks are described in the Business Model and Strategy in the full annual report and accounts. Financial risks arising from the Company's financial instruments are:

(i)    market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

(ii)    interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii)   foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales, bank loans and accrued income will fluctuate because of movements in currency rates;

(iv)   credit risk, being the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company; and

(v)   liquidity risk, being the risk that the Company may not be able to liquidate quickly its investments to meet obligations associated with its financial liabilities.

Market Price Risk

Mitigation of market price risk is part of the fund management process and is typical of equity investment. The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with an objective of maximising overall returns to shareholders. Further information on the investment portfolio is set in the full annual report and accounts.

If the investment portfolio valuation had fallen by 10% (2018: 10%) at 31 March 2019, the impact on the profit or loss and the net asset value would have been negative £17.0 million (2018: negative £15.2 million). If the investment portfolio valuation had risen by 10% (2018: 10%) at 31 March 2019, the impact on the profit or loss and the net asset value would have been positive £17.0 million (2018: positive £15.2 million). The calculations are based on the portfolio valuation as at the respective balance sheet dates.

Interest Rate Risk

FIXED RATE

The Company has a €10 million fully drawn fixed rate term loan with ING Bank N.V., with a Sterling equivalent of £8.6 million as at 31 March 2019, at a rate of interest of 1.33% per annum. An interest rate sensitivity analysis has not been performed as the Company has borrowed at a fixed rate of interest.

FLOATING RATE

When the Company retains cash balances, the cash is primarily held in accounts at the custodian. Interest received or paid on cash balances and bank overdrafts is at market rates and is monitored and reviewed by the Investment Manager and the Board. As at 31 March 2019, the cash position of the Company was £7.4 million (2018: £20.6 million).

If interest rates had increased by 1.0%, the impact on the profit or loss and the net asset value would have been positive £74,000 (2018: positive £206,000). If interest rates had decreased by 1.0%, the impact on the profit or loss and the net asset value would have been negative £74,000 (2018: negative £206,000). The calculations are based on the floating rate balances as at the respective balance sheet dates.

Foreign Currency Risk

The Company invests in overseas securities and holds foreign currency cash balances and foreign currency borrowings which give rise to currency risks. It is not the Company's policy to hedge this risk.

Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Company has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts of financial assets best represent the maximum credit risk exposure at the balance sheet date.

There were no significant concentrations of credit risk to counterparties at 31 March 2019 or 31 March 2018. No individual investment exceeded 3.6% of the investment portfolio at 31 March 2019 (2018: 4.2%).

A significant majority of the assets of the Company, including those that are traded on a recognised exchange, are held in segregated accounts on behalf of the Company by The Bank of New York Mellon (International) Limited, the Company's custodian. Bankruptcy or insolvency of this or other custodians may cause the Company's rights with respect to securities held by the custodians to be delayed. The Board monitors the Company's risk by reviewing the custodian's internal control reports.

6. This announcement is not the Company's full statutory accounts in terms of Section 434 of the Companies Act 2006.  Audited statutory accounts for the year to 31 March 2018, which were unqualified, have been lodged with the Registrars of Companies.  The audited statutory accounts for the year to 31 March 219 will be delivered to the Registrars of Companies.

7. The audited Annual report and Accounts for the year ended 31 March 2019 will be posted to shareholders and will be available for inspection at 16 Charlotte Square, Edinburgh, EH2 4DF, the registered office of the Company and on the Manager's website www.montanaro.co.uk.

For further information, please contact:

Montanaro Asset Management Limited

Tel: 020 7448 8600