European Smaller Companies Trust plc

Before you invest in a

Smaller Company you need to

understand their hopes and fears

Annual Report and Accounts 2022

The investment objective of Montanaro European Smaller

Companies Trust plc (the ‘Company’ or ‘MESCT’) is to achieve

capital growth by investing principally in Continental European

quoted smaller companies.

The Company’s benchmark index is the MSCI Europe ex-UK

SmallCap Index (in sterling terms).

The Company was launched in May 1981. Its current objective

and investment policy were adopted in September 2006.

Its Ordinary Shares are listed on the Main Market of the

London Stock Exchange.

The Company conducts its affairs so that its Ordinary Shares can be recommended by IFAs to ordinary retail investors

in accordance with the FCA’s rules relating to non-mainstream investment products and intends to continue to do so.

Contents

Highlights 1

Strategic Report

Chairman’s Statement 2

Manager's Report 4

ESG Report 8

Twenty Largest Holdings 10

Business Model and Strategy 12

Directors' Duties 19

Governance Report

Board of Directors 23

Directors' Report 24

Corporate Governance Statement 29

Report of the Audit Committee 32

Directors’ Remuneration Report 35

Management Report and Directors’

Responsibilities Statement 38

Financial Report

Independent Auditor’s Report 39

Statement of Comprehensive

Income 46

Balance Sheet 47

Statement of Changes in Equity 48

Statement of Cash Flows 49

Notes to the Financial Statements 50

AIFM Disclosures 63

Shareholder Information 64

Alternative Performance Measures 66

Glossary of Terms 68

Notice of Annual General Meeting 70

Advisers 78

This document is important and refers

to certain matters on which voting

action is required. Shareholders who

are in any doubt as to what action to

take should consult an appropriate

independent adviser immediately.

If any shareholder has sold or

transferred all their shares in the

Company, he or she should pass

this document to the purchaser or

transferee or to the person through

whom the transfer or sale was effected

for onward transmission to the

transferee or purchaser.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 1

Highlights

for the year ended 31 March 2022

Performance

Capital Returns%

(1)

1 year 3 year 5 year 10 year MAM*

Ordinary share price 4.3% 88.8% 141.7% 314.8% 426.3%

Net Asset Value ('NAV') per Ordinary share** 7.9% 69.7% 110.9% 263.9% 401.8%

Benchmark (Composite)

(2)

** 2.2% 35.1% 39.2% 180.7% 194.1%

Total Returns%

(1)

1 year 3 year 5 year 10 year MAM*

Ordinary share price 4.8% 92.6% 151.6% 363.1% 536.1%

NAV per Ordinary share** 8.4% 73.1% 119.0% 301.7% 494.6%

Benchmark (Composite)

(2)

** 3.8% 42.1% 51.7% 236.1% 291.2%

Sources: Morningstar Direct, Association of Investment Companies (‘AIC’), MAM.

As at

31 March

2022

As at

31 March

2021

12 month

% change

Ordinary share price

168.0p

161.0p

4.3

NAV per Ordinary share**

171.5p

158.9p

7.9

(Discount)/premium to NAV

(1)

(2.0%)

1.3%

Gross assets** (£’000s)

333,339

284,560 17.1

Net assets** (£’000s)

324,905

276,065 17.7

Market capitalisation** (£’000s)

318,238

279,709 13.8

Net gearing employed

(1)

4.6%

2.4%

Year

ended

31 March

2022

Year

ended

31 March

2021

12 month

% change

Revenue return per Ordinary share

0.96p

0.31p

209.7

Dividend per Ordinary share

0.925p

0.0

Ongoing charges

(1)

1.1%

1.2%

Portfolio turnover**

11%

22%

* From 5 September 2006, when Montanaro Asset Management Limited ('MAM') was appointed as Investment Manager.

** Details provided in the Glossary on pages 68 and 69.

31 March 2021 restated to reflect the subsequent 10 for 1 share split.

(1)

Refer to Alternative Performance Measures on pages 66 and 67.

(2)

From 5 September 2006, the benchmark was the MSCI Europe SmallCap Index. The benchmark was changed on 1 June 2009 to the MSCI Europe ex-UK

SmallCap Index (in sterling terms).

page 2 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Results

Please note that throughout this

report, previous year numbers

have been adjusted to account for

the share split (detailed below) for

comparative purposes.

As vaccines for COVID-19 rolled out

across the world, some of the aftershocks

of the pandemic became evident in

the form of supply chain stresses and

inflationary pressures. These were

exacerbated by the appalling Russian

invasion of Ukraine. The MSCI Europe (ex-

UK) Small Cap Index (in Sterling terms)

nevertheless rose by 2.2% during the

financial year ended 31 March 2022. In

comparison, the Net Asset Value (“NAV”)

of your Trust rose by 7.9 % to 171.5p per

share. Over this period, the share price

moved from a premium to NAV of over 1%

to a discount of 2%. As a result, the share

price total return of the Trust was 4.8%.

These headline numbers might appear

unremarkable but they disguise significant

volatility during the year. The first nine

months of the fiscal year were exceptionally

strong with the NAV rising by 34.7%,

outperforming the benchmark by 23.4%,

as high quality, growth companies were

particularly in favour with investors. In the

final three months of the fiscal year, these

trends sharply reversed as inflationary

pressures caused bond yields to rise,

stock markets to fall and high quality and

growth companies to be shunned. Indeed,

globally the dramatic rotation into Value

companies in January was the second

largest monthly shift in 50 years.

Nonetheless, we continue to believe that

companies capable of generating high

returns on capital employed – and that

can continue to grow while maintaining

or expanding those returns – will be the

ones that fundamentally increase most

in value over the long term. It is these

types of companies that are at the heart

of our investment philosophy. Despite

the setback in the last quarter of the

Company's financial year, MESCT has

delivered, over 3 and 5 years respectively

to 31 March 2022 a NAV total return of

20.1% and 17.0% p.a. outperforming the

benchmark by 7.6% and 8.3% p.a. This

makes it the best performing European

investment trust over these time periods.

Earnings and Dividends

Revenue earnings per share rose

significantly in the period to 0.96p

(2021: 0.31p) as many companies

returned to paying dividends on the back

of strong earnings and better visibility than

in the previous year, which coincided with

the onset of the pandemic.

We remain confident about the

long-term prospects of your investee

companies. The Trust holds substantial

revenue reserves which are available for

distribution to smooth any short-term

income volatility.

An interim dividend of 0.2p per share

was paid on 4 January 2022. The Board

recommends the payment of a final

dividend of 0.725p per share payable on

16 September 2022 to shareholders on

the register on 12 August 2022 (this is

unchanged from the prior year). Subject

to shareholder approval, this would bring

the total dividends for the year to 0.925p

per share.

ESG

Montanaro believes there is a correlation

between how well a business fares on

Environmental, Social and Corporate

Governance grounds and the value it

creates for its shareholders. This is why

ESG considerations have formed an

integral part of their assessment of a

company’s “Quality” and have been fully

integrated into the investment process for

many years.

The depth of Montanaro’s commitment

is perhaps best exemplified by the fact

that they are one of the few UK asset

managers to be a certified B Corporation

– a certification Montanaro have held

since 2019. Certified B Corporations

are businesses that meet the highest

standards of verified social and

environmental performance, public

transparency and legal accountability to

balance profit and purpose.

An expanded ESG Report is included on

pages 8 and 9 of this Annual Report.

Chairman’s Statement

for the year ended 31 March 2022

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 3

Share Split

Following shareholder approval at the

last AGM, shareholders received 10 New

Ordinary Shares in exchange for each

Existing Ordinary Share held at 5pm on

the Record Date of 13 September 2021.

The New Ordinary Shares were admitted

to trading on the premium segment of

the Main Market of the London Stock

Exchange on 14 September 2021.

Following the completion of the share

split, as at 14 September 2021, the Trust

had 179,682,600 New Ordinary Shares

in issue.

Subsequent to the share split, the Trust

made an application to the FCA and the

London Stock Exchange to increase its

block listing facility commensurate with

the share split. Application was made for

11,533,260 Ordinary Shares of 5 pence

each (the "Shares") to be admitted to the

Official List and to trading on the premium

segment of the Main Market of the

London Stock Exchange. The admission

was effective 16 September 2021.

Borrowings

The Board, in discussion with the

Manager, regularly reviews the gearing

strategy of the Trust and approves the

arrangement of any gearing facility.

Gearing increases (or decreases) the

returns from underlying profits or losses

generated by the investment portfolio.

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 Trust had borrowings (net of cash) of

4.6% compared to 2.4% at the beginning

of the year and nil at the end of December

2021. The Trust currently has borrowings

in the form of a €10 million fixed rate

loan and a €15 million revolving credit

facility, both of which are due to mature on

13 September 2023.

Issue of Shares

During the year, the Trust issued 750,000

shares from treasury (adjusted for

the share split) at a weighted average

premium of 1.5%. A further 14,945,000

new shares have been issued at a

weighted average premium of 2%.

The Board believes that issuing new

shares in the Trust is in the interests of

both new and existing shareholders as

it improves the liquidity of the shares

and provides a larger base over which

fixed costs can be spread. The value of

inflows to the Company from the issue

of shares in the year was £31 million

(excluding costs).

The Board’s stated treasury shares policy

is included in the Annual Report and

Accounts. The Board will seek to renew

the Trust’s share buyback and share

issuance authorities at the forthcoming

Annual General Meeting.

Communication with Shareholders

Over the past few years the composition

of our shareholder base has changed

significantly with an increasing number

of individual investors coming onto the

consequence we continue to explore

how best to communicate with our

shareholders irrespective of how they

access us and are keen to find ways to

encourage an open dialogue and keep

all shareholders up to date with key

developments. We have upgraded our

website – www.montanaro.co.uk/trust/

mesct – and it is continually updated

with factsheets, reports, presentations,

webinar recordings and commentaries as

well as more details about the Manager,

investment philosophy and process. We

encourage shareholders to visit regularly.

Annual General Meeting

Following the removal of all COVID related

restrictions it is the Company's intention

to resume AGM meetings in person.

Accordingly, the AGM will be held at the

offices of Montanaro Asset Management

Limited, 53 Threadneedle Street, London

EC2R 8AR, on 8 September 2022 at

11.0 0 a.m. Shareholders are encouraged

to attend the Meeting where there will be

an opportunity to meet and ask questions

of the Board and the Manager.

Outlook

The economic backdrop remains

extraordinarily volatile. In April 2020, WTI

Crude Oil Futures briefly traded for a

negative price but have exceeded $100

just two years later; Euro area Consumer

Price Inflation, which had been negative at

the end of 2020, reached 7.5% in March

2022; and the US 10 year bond yield,

well below 1% for most of 2020, was

well above 2% by March this year and is

expected to rise further. For the first time

in over a decade, significant monetary

tightening by the world’s most important

Central Banks looks likely.

The underlying causes of these shifts

were as unprecedented as they were

unpredictable. But as stated last year, the

Montanaro team avoids trying to forecast

macroeconomic developments, preferring

instead to focus on the fundamentals of

your individual investee companies. For

example, high quality companies with

pricing power are best placed to offset

inflationary pressures.

While we cannot predict what inflation,

GDP or interest rates will be a year from

now, we can say with some confidence

that if we invest in companies that can

deliver structural growth and high returns

on capital employed at reasonable

valuations, then investors should enjoy

attractive long-term returns. Previous

periods of significant underperformance

from such quality growth companies have

presented good buying opportunities

for those with a long-term investment

horizon. It is notable that the gearing of

the Trust has risen from the very low levels

seen in December 2021, reflecting what

Montanaro believe is a higher number

of attractive investment opportunities

following some of the share price falls we

have seen.

The disciplined investment process,

experienced team, and strong absolute

and relative returns since Montanaro

were appointed in 2006 enable us to look

forward to the future with confidence.

R M CURLING

Chairman

23 June 2022

page 4 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Manager’s 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 67 years, this has amounted to

an average of 3.6% per annum (“the

SmallCap Effect”). £1 invested in UK

large companies in 1954 would now

be worth £1,210, whereas the same

£1 invested in smaller companies would

now be worth over £10,139 – almost nine

times more.

There is less comprehensive data

on Europe – it only goes back to

2000. However, 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

5.8% per annum.

Moreover, while European LargeCaps

have underperformed their US

counterparts, the same is not true in

SmallCap. Since 2000, the MSCI Europe

(ex-UK) Small Cap Index has delivered

gross USD returns of just over 10% per

annum – ahead of the MSCI USA Small

Cap Index.

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

coverage at all. This makes it easier

for those with a high level of internal

resources to identify attractive,

undervalued investment opportunities

that are undiscovered by the wider

investing community. This in turn

makes it possible to deliver long-term

performance over and above that of the

benchmark.

Montanaro

Montanaro was established in 1991.

We have one of the largest and most

experienced specialist teams in the UK

dedicated exclusively to researching and

investing in quoted small companies.

Our team of 36 includes ten nationalities,

which gives us the breadth of resources

to conduct thorough in-house research.

At 31 March 2022, we were looking after

more than £4 billion of client assets.

Investment Philosophy and Approach

We specialise in researching and

investing in quoted small companies

and have a disciplined, two-stage

investment process.

In the first stage, we identify “good

businesses” within our investable

universe. 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.

A company must also pass our stringent

quality and ESG checklists. ESG has

been integrated into our disciplined

investment process for almost

two decades.

900

600

500

400

300

200

100

31 Dec

2000

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 18 21 31 Mar

2022

MSCI Europe (ex UK) SmallCap (in GBP terms) MSCI Europe (ex UK) LargeCap (in GBP terms)

700

800

17 2019

31 Dec

2000

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 18 2117 2019

Continental European Small v. LargeCap

(MSCI Europe ex UK SmallCap v. LargeCap indices, Net TR)

(rebased to 100 from 31 December 2000)

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 5

When we have found a company that

we believe is high quality, has structural

growth and is well managed from

a business and ESG perspective, it

must be approved by the Investment

Committee before it can be added to the

“Approved List”.

In the second stage, we determine the

intrinsic value of each company on the

Approved List to ensure they will make

a “good investment” (“good businesses”

and “good investments” are not always

the same). Companies that are on the

Approved List and which we believe are

attractively valued are considered for

inclusion in your portfolio.

We have an in-house team of eleven

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 believe that a deep understanding

of a company’s business model and

the way it is managed are essential.

In normal circumstances, we visit our

investee companies on a regular basis,

although this was not possible during

the pandemic. We are pleased to say

these visits have started to resume, with

our first site visit on the Continent since

the pandemic taking place in December.

We are now combining site visits, face to

face and virtual meetings.

We examine management’s past

track record in detail as we seek to

understand their goals and aspirations.

In smaller companies, the decisions

of the entrepreneurial management

can make or break a company (which

is why meeting them is so important).

We look closely at the board structure;

the level of insider ownership; and

examine remuneration and corporate

governance policies.

Once a company has been added to the

portfolio, our team conducts 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, growing companies bought

at sensible valuations. We keep turnover

and transaction costs low and follow our

companies closely over many years. We

would rather pay more for a higher quality,

more predictable company that can be

valued with greater certainty. Finally, we

align our interests with our investors by

investing meaningful amounts of our own

money alongside yours. We are significant

shareholders in the Trust.

The Portfolio

At 31 March 2022, the portfolio consisted

of 55 companies of which the top ten

holdings represented 36%. Sector and

country 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 Attribution

The year to 31 March 2022 saw

some strong performances from our

largest investments.

NCAB is a global market leader in the

supply of Printed Circuit Boards (PCBs).

In 2021, the company delivered high

organic revenue growth; made some

attractive bolt-on acquisitions; saw its

order intake (in USD) almost double;

and significantly expanded its operating

margins. The stock also began being

covered by a second sell-side institution

during the period.

Fortnox provides cloud-based

accounting systems to companies in

Sweden. The stock was our largest

contributor in the previous year and

continued to grow revenues and earnings

at strong double-digit rates in 2021. In

March 2022, the company announced

price increases for their subscription-

based products, news that was received

well by the market.

MIPS sells a patented insert for

helmets which protects the brain

against rotational motion. Like Fortnox

(above), this company also featured

in our top three contributors last year.

The company continued to persuade

more manufacturers to include MIPS in

their helmets, while existing customers

expanded the inclusion of MIPS into a

wider range of models. Perhaps most

notably, the expansion into safety

helmets in the commercial market has

got off to a strong start. Operating profit

for the company almost doubled in 2021.

The year was not without some stock

price falls as well. Our three largest

detractors are detailed below.

page 6 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Manager’s Report continued

£0–£500m

£500m–£1bn

£1bn–£3bn

£3bn–£5bn

>£5bn

£0–£500m

£500m–£1bn

£1bn–£3bn

£3bn–£5bn

>£5bn

8.9%

9.5%

46.3%

21.8%

13.5%

8.9%

9.5%

46.3%

21.8%

13.5%

6.8%

15.1%

34.1%

28.2%

15.8%

6.8%

15.1%

34.1%

28.2%

15.8%

20222022 20212021

Market Capitalisation of Holdings by Value (31 March 2022)

Orpea is a leading provider of nursing

homes, post-acute and rehabilitation

facilities and psychiatric care clinics. The

company was affected by allegations

of mistreatment of residents in a book

called “The Gravediggers”, which led

to the ousting of the CEO and negative

press in France. With concerns over the

quality of the business as a result we

sold the position.

Sinch is a Swedish developer of cloud

communications and mobile customer

engagement offerings. During the year

the company came under pressure as

telecom providers raised their tariffs.

Sinch was unable to completely pass

this rising cost on to its own customers,

implying commoditisation of the core

product. Furthermore, the company

has made multiple large acquisitions

which appear to be more difficult to

integrate than they expected. As a result,

the company’s level of debt increased

significantly. Sensing a deterioration

in the core quality of the business, we

therefore exited our position.

Gruppo MutuiOnline owns and

operates a leading range of online

comparison and intermediation brands

in Italy and provides Business Process

Outsourcing services for financial

services in the country. While Orpea

and Sinch were examples of mercifully

small portfolio positions that performed

poorly, Gruppo MutuiOnline was a larger

position which saw profit taking after a

very strong year last year. The business

continued to grow in 2021 and we

continue to hold the investment.

Sector Distribution (31 March 2022)

Source: Montanaro Asset Management Limited

nformation Technology

Industrials

Health Care

Financials

Consumer Discretionary

Consumer Staples

Real Estate

Communication Services

Materials

Energy

2022

2021

Geographical Analysis (31 March 2022)

Source: Montanaro Asset Management Limited

Switzerland

Belgium

France

Italy

Denmark

Netherlands

Portugal

Finland

Spain

Norway

Sweden

Germany

2022

2021

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 7

Portfolio Changes

We try to keep portfolio turnover as low

as possible. Nevertheless, we typically

make a few changes each year as we

identify new ideas that we consider

will provide stronger long-term returns

than existing holdings. Companies that

become too large, are acquired or where

the investment case deteriorates are

also replaced with new ideas from our

Approved List.

In the year to 31 March 2022, we

exited positions in companies including

Elekta, the developer of radiation

therapy equipment and software, as

we grew concerned about an even

more intense competitive threat from

its main peer Varian, which has been

acquired by Siemens Healthineers.

Recordati, which sells pharmaceuticals,

was sold as we believe there are more

compelling investments elsewhere in

the European healthcare landscape.

Sinch, as explained above, was sold

on fundamental concerns about

its business.

New additions to the portfolio included

hGears, which develops components for

gearboxes used on e-bikes and electric

vehicles and Sectra, which develops

Picture Archiving and Communication

Systems (PACS) for medical use.

Gearing

The Alternative Investment Fund

Manager (“AIFM”), in consultation with

the Board, is responsible for determining

the net gearing level of the Trust. The

Trust ended the fiscal year with gearing

of 4.6% (31 March 2021: 2.4%).

How to invest

We have invested a great deal of time

to make the Trust readily available to

all investors. We have continued to

grow our presence across the UK’s

investment platforms and are delighted

to see a steady increase, year after year,

in the Trust’s retail following. Together

with the Board, we have appointed

Marten & Co to provide sponsored

research – you can find the initiation

report published in March 2019 here:

https://www.montanaro.co.uk/mesct-

quality-business/ and an update report

published in March 2022 here: https://

quoteddata.com/research/montanaro-

european-smaller-companies-unfazed-

by-market-turmoil-mc/

For further details about how to

invest, please refer to the website:

www.montanaro.co.uk/trust/mesct

MONTANARO ASSET

MANAGEMENT LIMITED

23 June 2022

page 8 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

ESG Report

In March 2022, Montanaro won the Best Small & Mid-Cap

Sustainable Investment Boutique award from Ethical Finance.

This recognised Montanaro’s continuing commitment to

sustainable investing within its own business, across the

investment industry and in our investment process.

Montanaro became a certified B Corporation in 2019, placing

sustainability at its core. This was achieved by meeting

verified standards of social and environmental performance,

transparency and accountability. It is regarded as one of

the toughest sustainability standards to achieve globally.

Montanaro will recertify for “B Corp” status once again in 2022

and we expect to improve our score.

Montanaro continued to achieve industry leading standards

over the last year, notably becoming a first-wave signatory to

the revised UK Stewardship Code. The standards for the new

code were significantly higher than for the previous iteration

and one-third of asset managers failed to have their reports

approved by the Financial Reporting Council. We have a long

history of meeting the toughest of industry standards:

Signatory

date Initiative

2009 The UN Principles for Responsible Investment (PRI): 2009

2010 The UK Stewardship Code

2015 The Carbon Disclosure Project (CDP)

2016 The UK Stewardship Code (Tier 1 rating)

2017 The LGPS Code of Transparency

2018 Task Force on Climate-Related Financial Disclosures (TCFD)

2018 The Montreal Pledge

2019 Certified B Corporation

2019 Farm Animal Investment Risk and Return (FAIRR)

2019 Net Zero Carbon (NZC)

2020 Investor Statement on Coronavirus Response

2021 Access to Medicine Investor Statement

2021 Net Zero Asset Managers Initiative

2021 Global Investor Statement to Governments on the

Climate Crisis

2021 The revised 2020 UK Stewardship Code

In addition, during the year Montanaro played an active role

in the development of sustainable investing in the wider

investment industry. Having become a signatory to the

Net Zero Asset Managers initiative, Montanaro was the only

UK investment boutique to be invited to join the Glasgow

Financial Alliance for Net Zero (“GFANZ”) taskforce, chaired by

former Bank of England Governor, Mark Carney. Our Head of

Sustainable Investment sits on the Real Economy Transition

Workstream, which is working to improve the guidance given to

corporations on how the financial sector expects companies to

report on the transition to net zero.

We were also invited to co-chair the B Corporation Investment

& Working Group, a group of certified B Corporations in our

industry working together on best practice initiatives. As part of

this, we led a group of investment boutiques to the UN Climate

Change Summit COP26, in Glasgow, to discuss the benefits of

being a B Corporation in the financial sector.

These industry standards and our participation in collaborative

initiatives allows us to stay abreast of an area of the investment

world that is rapidly changing and ensure that our investment

process evolves accordingly.

Montanaro has a long track record of sustainable investing,

which has always been represented in the way the Portfolio

has been managed. Ethical restrictions mean that we do not

invest in companies that generate a significant proportion of

sales from products with negative societal impact such as

tobacco, gambling, armaments, alcohol, high-interest-rate

lending and fossil fuels. Similarly, we do not invest in companies

that conduct animal testing, unless it is required by law for

healthcare or regulatory purposes.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 9

The analysis of Environmental, Social and Governance (ESG)

factors has long formed part of our definition of a company’s

“Quality”. Over the last year, our Investment Team continued

to develop our approach to ESG analysis by redeveloping our

bespoke ESG Checklist, incorporating further data points that

are provided to us by MSCI. The analysis of such information

allows us to better understand the risks – and opportunities

– that our companies may be exposed to, from factors such

as climate change, supply chain risks and the structure of

company boards.

Where weaknesses are identified, we will always seek to

use our influence to improve a company through active and

long-term engagement. During the year we had a number of

engagements with Portfolio companies, including Mensch und

Maschine. When conducting research on the company, our

Analyst had identified that disclosure of ESG information lagged

certain peers, particularly in relation to carbon emissions data,

diversity of the workforce and compensation details. Given our

strong relationship with the company, we were able to speak

with the Founder and CEO, who was receptive to our ideas

for improvement. We will monitor these developments in the

months ahead.

Other engagements included NCAB, who asked for our views

on a more detailed version of its sustainability report. This is

a trend we have seen across many of our companies: they

recognise that we take sustainability seriously and are not afraid

to ask for our advice on what steps they should be taking.

We also engaged with Atoss Software as they attempted to

improve the gender diversity of its Board.

As well as these individual company engagements, the

Investment Team also conducted two “Deep Dive” ESG

focused research projects. The purpose of these is to focus on

specific subjects that impact companies across our Portfolio.

In previous years topics covered included Nutrition and Supply

Chain Management. During the year, we published our second

“Net Zero Carbon” Deep Dive – focused on understanding

how our companies are responding to climate change and

setting Net Zero Carbon targets. We also completed a Deep

Dive on Data Centres, to better understand how “big data”

is used and stored. These reports allow us to speak to

many different experts, including leading academics and

industry practitioners.

With almost every asset manager dedicating more time and

resource to ESG and sustainability, we believe that we remain

ahead of the curve. This is due to our experience, the high level

of in-house resource that we have at our disposal and our belief

that embedding ESG factors into an investment process leads

to better investment outcomes. We look forward to sharing

further developments with you in the coming years.

MONTANARO ASSET

MANAGEMENT LIMITED

23 June 2022

page 10 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Twenty Largest Holdings

as at 31 March 2022

1. NCAB

is a global full-service supplier of printed

circuit boards (PCBs).

2. MIPS

develops patented inserts for helmets,

which protects the brain against

rotational motion.

3. Fortnox

is Sweden’s leading provider of cloud-

based applications for accounting,

invoicing and payroll administration.

4. Sartorius Stedim

is a world leading supplier of equipment

and technologies used to produce

biopharmaceuticals.

5. MTU Aero Engines

manufactures and maintains aircraft

engines and components.

6. VZ Holding

is a Swiss independent financial

consultant and wealth manager.

7. IMCD

is one of the world’s largest speciality

chemical distributors.

8. Thule

is a global market leader of niche

products and solutions for outdoor

activities, including equipment such as

bike racks and roof boxes for vehicles.

9. Atoss Software

develops and sells workforce

management software in Europe.

10. CTS Eventim

is the market leading ticketing company in

Europe, providing an online platform from

which to sell tickets to a range of events

such as operas and pop concerts.

11. Reply

is an Italian IT services company.

12. Amadeus FiRe

is a leading personnel service company

in Germany, with integrated training and

further education offerings.

13. Esker

offers a cloud-based platform that

allows companies to digitise and

automate their accounts payable and

receivable processes.

14. Kitron

is a leading Scandinavian Electronic

Manufacturing Services (EMS) company.

15. Tecan

develops automated instruments and

solutions that are used in laboratories.

16. Belimo Holding

develops and manufactures electrical

motorised control devices (actuators) for

air and water. These are predominantly

used in large buildings with sophisticated

Heating, Ventilation and Air Conditioning

(‘HVAC’) systems.

17. QT Group

is a Finnish company that provides

software tools used to design and build

graphical user interfaces.

18. Brunello Cucinelli

is a luxury fashion company, particularly

famous for its cashmere products.

19. ChemoMetec

is a globally leading developer of

cell counters that are used in the

development of cell therapies.

20. Brembo

is a global leader in the design and

production of high end automotive

braking systems.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 11

Holding Country

31 March

2022

Value

£’000

31 March

2021

Value

£’000

31 March

2022

% of

investment

portfolio

31 March

2022

% of

net assets

31 March

2022

Market cap

£m

NCAB Sweden 18,810 10,039 5.5 5.8 1,005

MIPS Sweden 15,030 10,451 4.4 4.6 1,874

Fortnox Sweden 14,196 12,818 4.2 4.4 2,546

Sartorius Stedim France 13,205 11,963 3.9 4.1 28,982

MTU Aero Engines Germany 12,444 6,861 3.7 3.8 9,500

VZ Holding Switzerland 10,837 6,759 3.2 3.3 2,890

IMCD Netherlands 10,494 7,068 3.1 3.2 7,476

Thule Sweden 9,170 9,438 2.7 2.8 3,196

Atoss Software Germany 9,115 8,180 2.7 2.8 1,208

CTS Eventim Germany 8,395 6,342 2.5 2.6 5,037

Reply Italy 8,238 5,516 2.4 2.5 4,742

Amadeus FiRe Germany 8,224 5,830 2.4 2.5 697

Esker France 7,919 9,335 2.3 2.5 847

Kitron Norway 7,873 5,581 2.3 2.4 345

Tecan Switzerland 7,584 6,452 2.2 2.3 3,846

Belimo Holdings Switzerland 7,515 5,436 2.2 2.3 4,997

QT Group Finland 6,964 3,817 2.1 2.2 2,698

Brunello Cucinelli Italy 6,730 4,680 2.0 2.1 3,051

ChemoMetec Denmark 6,568 4,795 1.9 2.0 1,633

Brembo Italy 6,394 4,524 1.9 2.0 2,847

Twenty Largest Holdings 195,705 57.6 60.2

page 12 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Our objective is to achieve capital growth for our shareholders by investing principally in

Continental European quoted smaller companies. We seek to invest in well managed, high

quality, growth companies. We keep portfolio turnover low and follow our companies closely

over many years.

INTRODUCTION

The Company carries on business as an investment trust. The

Company is limited by Ordinary Shares which are traded on

the Main Market of the London Stock Exchange. The Company

has no employees but contracts investment management and

administration to appropriate external service providers, who

are subject to oversight by the Board of Directors. The principal

service providers during the year were:

– Montanaro Asset Management Limited (‘Montanaro’ or the

‘Manager’), which was appointed as Investment Manager on

5 September 2006 and the Company’s AIFM on 22 July 2014.

– Link Alternative Fund Administrators Limited, which provided

fund administration services during the year.

– Link Company Matters Limited, which provided company

secretarial services during the year.

– Equiniti Limited which provided registrar services during

the year.

– Bank of New York Mellon (International) Limited which

provided depositary services during the year.

BOARD OF DIRECTORS

The Board of Directors is responsible for the overall stewardship of

the Company, including investment and dividend policies, gearing,

corporate strategy, corporate governance and risk management.

Biographical details of the Directors, all of whom are independent

and non-executive, can be found on page 23. The Board consists

of two male Directors and one female Director.

The Directors have considered their duties under section 172

of the Companies Act 2006 in promoting the success of the

Company for the benefit of stakeholders and further detail on

this can be found on pages 19 to 22 An important responsibility

is the annual evaluation and appointment of the Manager,

which also acts as the Alternative Investment Fund Manager

(‘AIFM’). The outcome of the evaluation in the current year is set

out on page 30.

THE MANAGER

Established in 1991, Montanaro is a highly experienced specialist

investor in quoted smaller companies. It has one of the largest

teams in the UK researching and investing exclusively in quoted

smaller companies and currently manages over £4 billion, mainly

on behalf of leading financial institutions. Montanaro’s investment

philosophy and approach is set out in the Manager’s Report on

pages 4 and 5.

INVESTMENT STRATEGY

The Company’s investment strategy is set out in its objective and

investment policy as set out below.

Objective

The Company’s objective is to achieve capital growth by investing

principally in Continental European quoted smaller companies.

The Company’s benchmark index is the MSCI Europe ex-UK

SmallCap Index (in Sterling terms).

Investment Policy

The Company invests principally in quoted smaller companies within

the European Union, Norway and Switzerland (but is not restricted

from investing in smaller companies quoted on other European

stock exchanges). In addition, the Company may invest in:

• Companies listed on non-European stock exchanges that

derive significant revenues or profits from Europe;

• European securities, such as global depositary receipts, listed

on other international stock exchanges; and

• Debt issued by European governments or denominated in

European currencies.

The Company’s investment policy is flexible, enabling it to

invest in all types of securities of companies, including (but not

limited to) equities, preference shares, debt, convertible

securities, warrants and other equity-related securities. The

Company may also invest, where appropriate, in open-ended

collective investment schemes and closed-ended funds that

invest in Europe. It is not intended that the Company will acquire

securities that are unquoted or unlisted at the time of investment

(with the exception of securities which are about to be listed

or traded on a stock exchange). However, the Company may

continue to hold securities that cease to be quoted or listed if the

Manager considers this to be appropriate.

Investment risk is diffused through holding a range of securities

in different countries and industry sectors. Investments are

not limited as to country or sector basis weightings, but no

investment in the portfolio may exceed 10% of the Company’s

total assets at the time of investment. The Company may invest

in derivatives, financial instruments, money market instruments

and currencies solely for the purpose of efficient portfolio

management (i.e. solely for the purpose of reducing, transferring

or eliminating investment risk in the Company’s investments,

including any technique or instrument used to provide protection

against currency and credit risks).

Business Model and Strategy

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 13

The Company borrows funds for investment to enhance returns

over the long-term and may borrow in Sterling, Euros or other

currencies. The Board has set a maximum limit on borrowing, net

of cash, of 30% of shareholders’ funds at the time of borrowing.

The Company’s portfolio will normally be fully invested. However,

during periods in which changes in economic conditions or other

factors so warrant, the Company may reduce its exposure to

securities and increase its position in cash and money market

instruments. 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.

INVESTMENT OF ASSETS

At each Board Meeting, the Board receives a detailed presentation

from the Manager together with a comprehensive analysis of the

performance of the Company and confirmation of compliance with

investment restrictions during the reporting period. An analysis of

how the portfolio was invested as at 31 March 2022 is contained

in the Manager’s Report on pages 4 to 7 and the 20 largest

holdings are shown on pages 10 and 11.

PRINCIPAL AND EMERGING RISKS

The Company’s principal and emerging risks are set out in detail

on pages 15 to 17.

REVIEW OF PERFORMANCE AND OUTLOOK

The Company’s performance in meeting its objectives is

measured against key performance indicators (‘KPIs’) as set out

on page 1. Reviews of the Company’s returns during the financial

year, the position of the Company at the year end, and the outlook

for the coming year are contained in the Chairman’s Statement on

pages 2 and 3 and the Manager’s Report on pages 4 to 7, both of

which form part of this Strategic Report.

DIVIDEND POLICY

The Company’s primary aim is to deliver capital growth to its

shareholders, rather than dividend income. In determining

dividend payments, the Board takes account of income forecasts,

brought forward revenue reserves, the Company’s dividend

payment record and the Corporation Tax rules governing

investment trust status. These rules determine the minimum level

of dividend which must be paid in order to comply with Section

1158 of the Corporation Tax Act 2010 in respect of the retention

of distributable income. Dividends can also be paid from the

Capital Reserve from any surplus arising from the realisation of any

investment. The Company has revenue reserves which underpin

any short-term reduction in dividend income. The Company will

normally expect to pay its dividend from its distributable revenue

reserves, however it may also pay the dividend either partially or

fully from capital reserves, if required, to provide dividend stability

for shareholders.

TAXATION POLICY

The Company complies at all times with Section 1158 of the

Corporation Tax Act 2010 (“Section 1158”) such that it does not

suffer UK Corporation Tax on capital gains; and ensures that it

submits correct taxation returns annually to HMRC and settles

promptly any taxation due.

The Board is fully committed to complying with applicable

legislation and statutory guidelines, including the UK’s Criminal

Finances Act 2017, designed to prevent tax evasion in the

jurisdictions in which the Company operates.

BOARD DIVERSITY

Diversity is an important consideration in ensuring that the Board

and its committees have the right balance of skills, experience,

independence and knowledge necessary to discharge their

responsibilities. The Board is composed solely of non-executive

Directors and has one third female representation. The Board’s

approach to the appointment of non-executive Directors is based

on its belief in the benefits of having a diverse range of experience,

skills, length of service and backgrounds. The Board will always

appoint the best person for the job and will not discriminate on

the grounds of gender, race, ethnicity, religion, sexual orientation,

age, social background or physical ability. The right blend

of perspective is critical to ensuring an effective Board and

successful company.

KEY PERFORMANCE INDICATORS

The Board recognises that it is long-term share price returns that

are most important to the Company’s shareholders. They are

largely driven by competitive portfolio returns and by keeping

down the level of both the discount and ongoing charges.

The Board uses a number of key performance indicators to

assess the Company’s success in pursuing its objectives.

They are as follows:

• Capital and total return – NAV and share price returns,

both absolute and against the benchmark;

• Discount of share price to NAV per share;

• Gearing; and

• Ongoing charges.

The NAV and share price returns against the benchmark index for

the one, three, five and ten year periods ended 31 March 2022

and for the period since Montanaro Asset Management Limited

(‘MAM’) were appointed as Investment Manager are shown below.

The historic discount and ongoing charges figures are included in

the Historic Record below.

The Company’s performance for the year against the key

performance indicators, together with the outlook for the coming

year, is reported within the Highlights on page 1, the Chairman’s

Statement on pages 2 and 3 and the Manager’s Report on pages

4 to 7.

page 14 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

CAPITAL RETURNS TO 31 MARCH 2022

1 year

3 year

5 year

10 year

MAM

Montanaro European Smaller Companies Trust

Share price

4.3 88.8 141.7 314.8 426.3

Montanaro European Smaller Companies Trust

NAV

7.9 69.7 110.9 263.9 401.8

Benchmark (Composite)^* 2.2 35.1 39.2 180.7 194.1

From 5 September 2006, when MAM were appointed as Investment Manager.

^ From 5 September 2006, the benchmark was the MSCI Europe SmallCap Index. The benchmark was changed on 1 June 2009 to the MSCI Europe ex-UK SmallCap

Index (in sterling terms).

* Details provided in the glossary on pages 68 and 69.

HISTORIC RECORD

Net assets

£’000s

NAV

per share

Ordinary

Share price

(Discount)/

premium

Dividends

per share

Ongoing

Charges***

5 September 2006* 60,022 344.0p 322.0p (6.4%) n/a 1.6%

31 March 2007 74,447 426.7p 404.0p (5.3%) 4.00p 1.8%

31 March 2008 69,061 401.6p 340.0p (15.3%) 4.00p 1.8%

31 March 2009 42,653 257.4p 220.8p (14.2%) 7.33p** 1.6%

31 March 2010 71,059 428.8p 373.0p (13.0%) 4.50p 1.7%

31 March 2011 88,837 536.0p 467.0p (12.9%) 4.50p 1.6%

31 March 2012 81,278 471.6p 405.0p (14.1%) 5.50p 1.5%

31 March 2013 93,009 559.2p 519.3p (7.1%) 6.75p 1.5%

31 March 2014 98,683 593.3p 540.0p (9.0%) 7.00p 1.5%

31 March 2015 95,751 572.2p 515.0p (10.0%) 7.50p 1.5%

31 March 2016 106,418 636.0p 540.0p (15.1%) 7.50p 1.4%

31 March 2017 136,050 813.1p 695.0p (14.5%) 8.25p 1.2%

31 March 2018 150,776 901.1p 800.0p (11.2%) 8.50p 1.2%

31 March 2019 169,141 1010.8p 890.0p (12.0%) 9.00p 1.2%

31 March 2020 160,123 956.9p 880.0p (8.0%) 9.25p 1.2%

31 March 2021 276,065 1,589.0p 1,610.0p 1.3% 9.25p 1.2%

1 for 10 share split effective from 14 September 2021

31 March 2022 324,905 171.5p 168.0p (2.0%) 0.925p 1.1%

* Date of commencement of current management arrangements.

** Includes special dividends of 2.83p per share.

*** Ongoing Charges. Refer to Alternative Performance Measures on page 66.

Discount. Refer to Alternative Performance Measures on page 66.

PRINCIPAL AND EMERGING RISKS AND UNCERTAINTIES AND RISK MITIGATION

In accordance with the AIC Code of Corporate Governance, the Board has an established process for identifying, evaluating and

managing the emerging and principal 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.

The Report of the Audit Committee on pages 32 to 34 summarises the Company’s internal control and risk management arrangements.

By means of the procedures set out in that summary, and 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. During the year, the Audit Committee have carried out a robust

assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future

performance, solvency or liquidity.

Business Model and Strategy continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 15

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

Notes 16 to 20 to the accounts provide detailed explanations of the risks associated with the Company’s financial instruments and their

management.

Principal Risks Mitigation

Investment and strategic risk:

Inappropriate strategy, including country and sector allocation

and stock selection could lead to poor returns for shareholders.

No material change in overall risk in year.

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.

No change in overall risk in year.

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 in the

form of a fixed rate loan €10 million and a €15 million revolving

credit facility, both of which mature in September 2023. As at

31 March 2022, €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 (such as a global pandemic), protectionism,

inflation or deflation, changes in regulation and taxation, excessive

stock market speculation, economic recessions, political instability

(such as the current war in Ukraine), 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.

No change in overall risk in year.

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. 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. 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.

The liquidity of the portfolio is monitored by the Manager and

reported to the Board, and market conditions and their impacts

are considered.

The Company’s liquidity risk is managed on a daily basis by the

Manager in accordance with established policies and procedures

in place.

Further details on the financial risks arising from the Company’s

financial instruments, together with the policies for managing these

risks are included in notes 15 to 20 to the accounts.

page 16 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Principal Risks Mitigation

Discount volatility:

As with all small company investment trusts, discounts can

fluctuate significantly both in absolute terms and relative to their

peer group.

No material change in overall risk in year.

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.

No change in overall risk in year.

The Company Secretary and the Company’s professional advisers

provide reports to the Board in respect of compliance with all

applicable rules and regulations.

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 during the year.

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.

Cyber security risks and their impact on data security are

inherent in the operations undertaken by the Company's

third-party suppliers and risk disruption to business operations

or financial loss.

No change in overall risk in year.

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

on pages 32 and 33. These reports include controls over risks of cyber

security. 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.

Business continuity plans at all service providers have been

implemented and services have continued with no disruption. The

Manager has been in regular contact with the Board and has reported

no matters of concern in continuity of operations.

Business Model and Strategy continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 17

Principal Risks Mitigation

Cyber Security

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.

New risk category.

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.

The annual review of the Administrator’s controls includes

consideration of cyber risk. A letter confirming that appropriate

cyber security controls are in place is requested on an annual basis

from all third party service providers.

Environmental, Social and Governance (“ESG”)

The key risk is that the Manager invests in a company which has

poor ESG practices. It is the Manager’s opinion that companies

with poor standards of ESG are likely to underperform over the

long-term. Key ESG risks include:

Environmental

• Climate change and greenhouse gas emissions ("GHG")

• Resource depletion, including water

• Waste and pollution

Social

• Working conditions, including no slavery or child labour

• Health and safety

• Employee relations and diversity

Governance

• Executive pay

• Board diversity and structure (in terms of age, gender,

educational and professional background)

• Anti-bribery and corruption

No change in overall risk in year.

Montanaro is a certified B Corporation and therefore takes ESG

and sustainability issues seriously. A strong and consistently applied

investment process is in place and ESG risks are considered for

every company in which the Manager considers investing in.

An ethical framework excludes investment in companies that

generate a significant proportion of sales from products with

negative societal impact. A bespoke ESG Checklist is completed

for every company by Montanaro’s team of Research Analysts and

the Manager only invests in those which pass the criteria set out

in this Checklist, which is designed to cover the aforementioned

Environmental, Social and Corporate Governance Risks.

Overview is provided by Montanaro’s Sustainability Committee,

which review ESG stock analysis and coordinates detailed

engagement activity with investee.

The Board receives reports at each Board meeting which include

ESG considerations for new and existing investments.

Manager

Should the Manager not be in a position to continue to manage

the Company, performance may be impacted.

No change in overall risk in year.

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.

page 18 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Business Model and Strategy continued

VIABILITY ASSESSMENT AND STATEMENT

In accordance with the AIC Code of Corporate Governance, 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, liquidity and solvency, including the impact of a

significant fall in equity markets or adverse currency movements

on the Company’s investment portfolio. They also considered the

impact of the Covid-19 pandemic on the quality and continuity

of the Manager’s operations and those of third-party service

providers. These risks, their mitigations and the processes for

monitoring them are set out on pages 14 to 17 in Principal Risks

and Uncertainties and Risk Mitigation, pages 32 and 33 in the

Report of the Audit Committee and in the notes to the 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 by

investment income and total 1.1% of average net assets;

• Future revenue and expenditure projections and the potential

impact of reduced dividend income in the short term as a

result of market conditions;

• The Company’s borrowing in the form of fixed rate 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. The Company also has a €15 million

revolving credit facility which also matures on 13 September

2023, of which €10 million was drawn down as at 31 March

2022. These loans were covered 20 times by the Company's

total assets as at 31 March 2022;

• 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 89% of the

portfolio could be liquidated under normal conditions within

ten business 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

2025, 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

2025. For this reason, the Board also considers it appropriate to

continue adopting the going concern basis in preparing the Report

and Accounts.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 19

Directors’ Duties

SECTION 172 OF THE COMPANIES ACT 2006

Section 172 of the Companies Act 2006 (the “Act”) requires

Directors to act in good faith and in a way that is the most likely

to promote the success of the company. In doing so, Directors

must take into consideration the interests of the various

stakeholders of the Company, the impact the Company has

on the community and the environment, take a long-term view

of consequences of the decisions they make as well as aim to

maintain a reputation for high standards of business conduct

and fair treatment between the members of the Company.

Fulfilling this duty naturally supports the Company in achieving

its Investment Objective and helps to ensure that all decisions

are made in a responsible and sustainable way. In accordance

with the requirements of the Companies (Miscellaneous

Reporting) Regulations 2018, below, the Board explains how

the Directors have individually and collectively discharged their

duties under section 172 of the Act over the course of the

reporting period.

To ensure that the Directors are aware of, and understand, their

duties they are provided with a tailored induction, including

details of all relevant regulatory and legal duties as a Director of

a UK public limited company when they first join the Board, and

continue to receive regular and ongoing updates and training

on relevant legislative and regulatory developments.

They also have continued access to the advice and services

of the Company Secretary, and when deemed necessary,

the Directors can seek independent professional advice. The

schedule of Matters Reserved for the Board, as well as the

Terms of Reference of its committees are reviewed periodically

and further describe Directors’ responsibilities and obligations

and include any statutory and regulatory duties.

CULTURE

During the year, the Directors also considered the Company’s

culture and values and have worked to incorporate these

behaviours and processes into the annual review of the

Manager, strategic planning, the annual evaluation of Board

effectiveness and reporting to stakeholders – thus embedding

consideration of stakeholders’ interests, long-term perspective,

maintaining reputation for fairness and high standards of

governance, corporate reporting and business conduct more

generally in the Company’s culture and processes.

DECISION-MAKING

The importance of stakeholder considerations, in particular

in the context of decision-making, is regularly considered by

the board and taken into account at every board meeting. A

paper setting out the Directors' responsibilities under s.172 is

tabled at the start of every board meeting. For example, the

strategic planning discussions involve careful considerations

of the longer-term consequences of any decisions and

their implications on shareholders and other stakeholders,

and are supported by detailed analysis based on various

scenarios, which include assumptions around the Company’s

contractual commitments; availability of funding; borrowing;

foreign currency management; as well as the wider economic

conditions and market performance.

COMMUNITY AND ENVIRONMENT

The Board recognises that the Company has certain

responsibility to its shareholders, stakeholders and wider

society. While as an externally managed investment firm the

Company itself does not have employees or offices, the Board

endorses the Manager’s policy to invest the Company’s funds

in a socially responsible manner. Environmental, social and

governance factors are an integral part of the investment

process. In addition, the Manager does not invest in companies

that it deems to be harmful to society or the environment;

this includes companies involved in tobacco, fossil fuels,

gambling, adult entertainment, weapons manufacturing and

alcohol. The Board monitors investment activity to ensure they

are compatible with the policy and receives periodic updates

from the Manager on its initiatives and performance against its

ESG goals.

The Manager is a signatory to the Principles for Responsible

Investment, the UK Stewardship Code, the Carbon Disclosure

Project and the LGPS Code of Transparency. In June 2019,

Montanaro became a “B Corporation”, a business certified

for meeting the highest verified standards of social and

environmental performance, transparency and accountability.

In 2021, Montanaro was invited to co-chair the B Corporation

Investment & Working Group and attended the UN Climate

Change Summit COP26 as a member of the Glasgow Financial

Alliance for Net Zero taskforce. Further information is included

in the ESG Report on pages 8 and 9.

BUSINESS CONDUCT

Board policies are all reviewed on at least an annual basis, and

the Directors ensure that they appropriately define obligations

and correct procedures. The Report of the Audit Committee,

which can be found on pages 32 to 34 of this Report, further

explains how the Committee reviews the risk management

and internal controls of the Company. This includes reasonably

satisfying itself that relevant systems and controls in place

remain effective and appropriate.

page 20 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

STAKEHOLDERS

The Board seeks to understand the needs and priorities of the Company’s stakeholders and these are taken into account during

all its discussions and as part of its decision-making. While as an externally managed investment Company, the Company does

not have any employees or customers, its key stakeholders include:

Stakeholders Why they are so important? Board engagement

Shareholders

Continued shareholder support

and engagement are critical to

existence of the Company and

the delivery of the long-term

strategy of the Company.

The Company has more than 1,100 shareholders. Over the

years, the Company has developed various ways of engaging

with its shareholders, in order to gain an understanding of the

views of our shareholders. These include:

• Website – The Company’s website is regularly updated

with factsheets, reports, presentations, webinar recordings

and commentaries as well as more details about the

Manager, investment philosophy and process;

• Annual General Meeting – The Company welcomes

attendance from shareholders at its Annual General

Meeting. With the exception of 2020 (owing to the Covid-19

pandemic), the Manager always delivers a presentation and

all shareholders have an opportunity to meet the Directors

and ask questions. The Board greatly values the feedback

and questions it receives from shareholders and takes

action or makes changes as and when appropriate;

• Presentations – The annual and interim results, as well

as monthly factsheets are available on the Company’s

website. Feedback and/or questions the Company

receives from the shareholders help the Company to evolve

its reporting, aiming to render the reports and updates

transparent and understandable; and

• Investor Relations updates – At every Board meeting,

the Directors receive updates on the share trading activity,

share price performance and any shareholders’ feedback,

as well as any publications or comments in the press.

SERVICE PROVIDERS

The Manager

The Manager’s performance

is critical for the Company to

successfully deliver its investment

strategy and meet its objective.

Maintaining a close and constructive working relationship with

the Manager is crucial as the Board and the Manager both aim

to continue to achieve consistent, long-term returns in line with

the Company’s investment objective. Important components in

the collaboration with the Manager, which are representative of

the Board’s culture are:

• Encouraging open discussion with the Manager;

• Recognising that the interests of shareholders and the

Manager are for the most part well aligned, adopting a

tone of constructive challenge, balanced when those

interests are not fully congruent by robust negotiation of the

Manager’s terms of engagement; and

• Willingness to make the Directors’ experience available to

support the Manager in the sound, long-term development

of its business and resources, recognising that the

long-term health of the Manager is in the interests of

shareholders in the Company.

Directors’ Duties continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 21

Stakeholders Why they are so important? Board engagement

Other service providers,

including:

the Company Secretary,

the Administrator, the

Registrar, the Depositary,

the AIFM, the Custodian

and the Broker

In order to function as an

investment trust with a premium

listing on the London Stock

Exchange, the Company engages

a diverse range of advisors for

support with meeting all relevant

obligations.

The Board maintains regular contact with its key external

providers, both through the Board and committee meetings,

as well as outside of the regular meeting cycle. Their advice,

as well as needs and views are routinely taken into account.

In addition, the Board also undertakes periodic reviews of the

external service providers and addresses any concerns raised

in those reviews. It also holds relationship meetings and formally

hears, and acts on, their feedback, as appropriate.

Bank

Availability of funding and liquidity

are crucial to the Company’s

ability to take advantage of

investment opportunities as

they arise.

In recognition of the importance of funding availability, the

Company aims to demonstrate to lenders that it is a well

managed business, and in particular, that the Board focuses

regularly and carefully on the management of risk.

Institutional Investors and

proxy advisors

The evolving practice and support

of the major institutional investors

and proxy adviser agencies are

important to the Directors, as the

Company aims to maintain its

reputation and high standards

of corporate governance, which

contributes to the long-term

sustainable success of the

Company.

Recognising the principles of stewardship, as promoted by

the UK Stewardship Code, the Board welcomes engagement

with all our investors. The Board recognises that the views,

questions from, and recommendations of many institutional

investors and proxy adviser agencies provide a valuable

feedback mechanism and play a part in highlighting evolving

shareholders’ expectations and concerns.

Regulators

The Company can only operate

with the approval of its regulators

who have a legitimate interest in

how the Company operates in the

market and treats its shareholders.

The Company regularly considers how it meets various

regulatory and statutory obligations and follows voluntary and

best-practice guidance, is mindful of how any governance

decisions it makes can have an impact on its shareholders and

wider stakeholders, in the short and in the longer-term.

Community and

Environment

The Board recognises that it

has a responsibility to the wider

environment and community.

Our engagement with the community and the environment can

be found on page 19. A detailed ESG Report can be found on

pages 8 and 9.

page 22 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

PRINCIPAL DECISIONS DURING THE YEAR ENDED 31 MARCH 2022

Examples of the Board’s principal decisions during the year, how the Board fulfilled its duties under section 172 of the Act and the

related engagement activities are set out below:

Principal decision Stakeholder Considerations and Engagement

To issue new shares and shares

from treasury, and to apply for a

block listing

Issuing shares allows the Company to increase its liquidity and meet natural demand in

the market which is an important consideration for shareholders. Furthermore, successful

investment of the capital raised in issuances will promote further growth of the Company’s

NAV. When evaluating such decisions, the Board takes full account of the impact of any

such issuances on the existing shareholder base.

To enact a share split

Following shareholder approval at the AGM, shareholders on 14 September 2021 received

10 New Ordinary Shares in exchange for each Existing Ordinary Share held at the Record

Date. The New Ordinary Shares were admitted to trading on the premium segment of

the Main Market of the London Stock Exchange on 14 September 2021. Following the

completion of the share split, as at 14 September 2021, the Company had 179,682,600

New Ordinary Shares in issue.

The significant movement from institutional to retail and platform shareholders on the

Company’s share register during the previous five years was considered. Factors included

increased dividend reinvestment and daily transaction volumes as a result of the growing

number of retail investors. A sub-division was considered as a way to make smaller sized

share dealings more efficient, improve liquidity of shares to facilitate increased volumes

and ensure that the current share price did not impede certain types of investor.

To implement a management

fee change

Under the terms of the Investment Management Agreement (“IMA”), MAM is currently

entitled to receive a management fee of 0.90% per annum of the Company’s market

capitalisation. Following the Remuneration Committee meeting in February 2021,

discussions were held with MAM to link the management fee to the size of the Company.

Accordingly, it was agreed that, with effect from 1 April 2021, the management fee would

be linked to the size of the Company, as follows:

• 0.90% p.a. of the amount of the Company’s market capitalisation up to £500 million;

• 0.75% p.a. of the amount of the Company’s market capitalisation between £500

million and £750 million; and

• 0.65% p.a. of the amount of the Company’s market capitalisation above £750 million.

The Chairman’s Statement on pages 2 and 3, the Manager’s Report on pages 4 to 7, the Twenty Largest Holdings on pages 10 and 11,

all form part of this Strategic Report on pages 2 to 22, which has been approved by the Board of Directors.

By order of the Board

LINK COMPANY MATTERS LIMITED

Company Secretary

23 June 2022

Directors’ Duties continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 23

Board of Directors

Caroline Roxburgh – Senior Independent Director and Chair of the Audit Committee

Date of Appointment: 8 November 2017

Caroline is a Chartered Accountant and was previously a partner at

PricewaterhouseCoopers. She has over 30 years’ business, finance and audit

experience across a number of industries and sectors bringing extensive experience

to the Board. Caroline also holds a number of other board positions including as a

Non-Executive director of the Edinburgh Worldwide Investment Trust plc. She is an

experienced Chair of Audit and Risk Committees and holds that position on other

Boards of which she is a member.

Relevant skills and experience and reasons for re-election:

Caroline’s experience as a senior Board advisor, Assurance Partner and Chartered

Accountant brings valuable business, financial, governance and risk management

skills to the Board, which enables her to assess the financial position of the

Company, to lead discussions regarding the Company’s risk management

framework and risk appetite and to contribute to developing the Company’s strategy.

Her broad range of experience as a Chair of Audit and Risk Committees helps inform

her role as Chair of the Company’s Audit Committee. Given her experience on the

Board, Caroline was appointed Senior Independent Director on 31 December 2020.

Following a rigorous board evaluation process, the Board agreed that Caroline

continues to be an effective member of the Board.

Richard Curling – Chairman of the Board and

Chairman of the Nomination Committee

Date of Appointment: 2 November 2015

Richard was appointed to the Board as an independent non-executive director in

2015 and was appointed as Chairman of the Board on 29 August 2018. Richard has

over 30 years’ experience as a fund manager and is currently an investment director

at Jupiter Fund Management Plc with extensive experience of investment trusts.

Relevant skills and experience and reasons for re-election:

Richard has comprehensive experience of investment management and the wider

Investment Company sector. This has provided a strong basis for assessing, and where

appropriate challenging, the Manager, on the Company’s performance, and in leading

the Board in strategic discussions. Following a rigorous board evaluation process, the

Board agreed that Richard continues to be an effective member of the Board.

Gordon Neilly – Non-Executive Director and Chair of the Remuneration Committee

Date of Appointment: 21 September 2020

Gordon is Executive Chairman of WhiteStar Asset Management Europe, and

non-executive director of Personal Assets Trust plc. Previously Chief of Staff at

Standard Life Aberdeen, prior to which he was Head of Strategy and Corporate

Activity at Aberdeen Standard Investments, Co-Chief Executive Officer of Cantor

Fitzgerald Europe, Chief Executive of Intelli Corporate Finance and Finance and

Business Development Director of Ivory & Sime plc.

Relevant skills and experience and reasons for re-election:

Gordon has gained an in depth knowledge of strategical matters, extensive

leadership skills and possesses a wealth of experience in business transformation

and developing strategies through his executive roles, particularly within the

investment company sector. Gordon’s diverse skill-set and strategic awareness

facilitates open discussion and allows for constructive challenge in the boardroom,

which brings a unique perspective and insight to the Board. Following a rigorous

board evaluation process, the Board agreed that Gordon continues to be an effective

member of the Board.

The Directors of the Company who were in office during the financial year and up to the date of signing the financial statements were:

page 24 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Directors’ Report

The Directors submit the Annual Report and Accounts of the

Company for the year ended 31 March 2022.

MANAGEMENT REPORT

For the purposes of compliance with Disclosure Guidance and

Transparency Rules (‘DTR’) DTR 4.1.5 R (2) and DTR 4.1.8 R,

the required content of the ‘Management Report’ can be found

in the Strategic Report and this Directors’ Report. The following

disclosures required to be included in this Directors’ Report

have been incorporated by way of reference to other sections of

this report and should be read in conjunction with this report:

• Corporate Governance Statement – refer to pages 29 to 31

of this report;

• Strategy and relevant future developments – refer to the

Chairman’s Statement on pages 2 and 3, the Manager’s

Report on pages 4 to 7 of the Strategic Report; and

• Financial risk management objectives and policies. An analysis

of the portfolio is provided in note 15 on page 59.

Further information about financial instruments and capital

disclosures is provided in note 15 on page 59.

STATEMENT REGARDING ANNUAL REPORT AND ACCOUNTS

Following a detailed review of the Annual Report and Accounts

by the Audit Committee and the Board, the Directors consider

that, taken as a whole, it is fair, balanced and understandable

and provides the information necessary for shareholders to

assess the Company’s position and performance, business

model and strategy. In reaching this conclusion, the Directors

have assumed that the reader of the Annual Report and

Accounts would have a reasonable level of knowledge of

the investment industry in general and investment trusts

in particular. The outlook for the Company is set out in the

Chairman’s Statement on page 3. Principal risks can be found

on pages 15 to 17, with further information on risk management

objectives in notes 16 to 20 to the accounts.

POST BALANCE SHEET EVENTS

Disclosures relating to post balance sheet events can be found

in note 23 to the accounts on page 62.

RESULTS AND DIVIDENDS

The results for the year are set out in this Annual Report and

Accounts. An interim dividend of 0.20p per Ordinary Share

was paid on 4 January 2022. The Board recommends a final

dividend for the year of 0.725 per Ordinary Share payable

on 16 September 2022 to shareholders on the register on

12 August 2022. The ex-dividend date will be 11 August 2022.

PRINCIPAL ACTIVITY AND STATUS

The Company is registered as a public limited company in

Scotland (registered number SC074677) and is an investment

company within the terms of Section 833 of the Companies Act

2006. Its shares are quoted on the Main Market of the London

Stock Exchange.

The Company carries on business as an investment trust and

has been approved as such by HM Revenue and Customs,

subject to it continuing to meet the relevant eligibility conditions

and ongoing requirements. The Company intends to conduct its

affairs so as to enable it to comply with the requirements.

DISCLOSURE OF RELEVANT INFORMATION TO THE AUDITOR

Having made the requisite enquiries, so far as the Directors

are aware, there is no relevant audit information (as defined

by Section 418(3) of the Companies Act 2006) of which the

Company’s Auditor is unaware and each Director has taken

all steps that ought to have been taken to make themselves

aware of any relevant audit information and to establish that the

Company’s Auditor is aware of that information.

INDEPENDENT AUDITOR

A resolution to appoint PricewaterhouseCoopers LLP (“PwC”)

as the auditor to the Company was approved by shareholders

at the 2021 Annual General Meeting for the financial year ending

31 March 2022. This is the first year that PwC is acting as the

Company’s Auditors. PwC has confirmed its willingness to continue

in office as the Auditor of the Company (“the Auditor”). A resolution

to re-appoint PwC as the Auditor to the Company and to authorise

the Audit Committee to determine the Auditor’s remuneration will

be proposed to the forthcoming Annual General Meeting.

DIRECTORS

Biographical details of the Directors, all of whom are independent

and non-executive, can be found on page 23. The Directors’

interests in the shares of the Company are shown on page 37.

Unless otherwise determined by ordinary resolution, the

Company shall not have fewer than two, or more than ten

Directors (disregarding alternate Directors). The Company or the

Board may appoint any person to be a Director and a Director

is not required to hold any shares of the Company. Any Director

appointed by the Board shall hold office only until the next Annual

General Meeting and shall then be eligible for election.

In accordance with the Company’s Articles (the “Articles”),

each Director must retire from office at the third Annual

General Meeting after the Annual General Meeting at which

he or she was last elected. However, as explained in more

detail under the Corporate Governance Statement on page

29, the Board has agreed that all Directors will retire annually.

Accordingly, Mr Curling, Ms Roxburgh and Mr Neilly will

retire at the forthcoming Annual General meeting and, being

eligible, offer themselves for re-election. (Resolutions 4 – 6).

Biographical details of all directors and their reasons for re-

election are set out on page 23. The Board confirms that,

following formal performance evaluations, the performance

of all directors continues to be effective and demonstrates

commitment to the role, and believes that it is therefore in the

interests of shareholders that they are elected or re-elected. In

recommending these resolutions, the Board, supported by its

Nomination Committee, has considered its current composition,

to ensure the overall composition of the Board in terms of skills,

experience and background is appropriate.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 25

No Director has a contract of service with the Company and no

Director has any material interest in any contract to which the

Company is a party.

DIRECTORS’ INDEMNITIES

As at the date of this report, indemnities are in force between

the Company and each of its Directors under which the

Company has agreed to indemnify each Director, to the extent

permitted by law, in respect of certain liabilities incurred as

a result of carrying out his or her role as a Director of the

Company. The Directors are also indemnified against the costs

of defending any criminal or civil proceedings or any claim by

the Company or a regulator as they are incurred provided that

where the defence is unsuccessful the Director must repay

those defence costs to the Company. The indemnities are

qualifying third party indemnity provisions for the purposes of

the Companies Act 2006 and were in force during the financial

year and remain as at the date of this report.

A copy of each deed of indemnity is available for inspection at the

Company’s registered office during normal business hours and

will be available for inspection at the Annual General Meeting.

POWERS OF THE DIRECTORS

Subject to the provisions of the Companies Act 2006, the

Articles and to any directions given by the Company in general

meeting by special resolution, the business of the Company

is managed by the Board, which may exercise all the powers

of the Company whether relating to the management of the

business of the Company or not. In particular, the Board may

exercise all the powers of the Company to issue shares or other

securities and to borrow money and to mortgage or charge all

or any part of the Company’s assets.

CONFLICTS OF INTEREST

Each Director has a statutory duty to avoid a situation where

they have, or could have, a direct or indirect interest which

conflicts, or may conflict with the interests of the Company.

A Director will not be in breach of that duty if the relevant matter

has been authorised in accordance with the Articles. The

Board has approved a protocol for identifying and dealing with

conflicts and has resolved to conduct a regular review of actual

or possible conflicts and any authorised conflicts. No conflicts

or potential conflicts were identified during the year.

INVESTMENT MANAGEMENT ARRANGEMENTS

Montanaro provides investment management services to the

Company and is the Company’s AIFM. Under the terms of the

investment management agreement, Montanaro is entitled to

receive a management fee of 0.9% per annum of the Company’s

market capitalisation (payable monthly in arrears). Montanaro

is also entitled to a fee of £50,000 per annum for acting as

the Company’s AIFM. Montanaro’s appointment may be

terminated by either party giving to the other not less than six

months’ notice. The investment management agreement may

be terminated earlier by the Company provided that a payment

in lieu of notice, equivalent to the amount the Manager would

otherwise have received during the notice period, is made.

Under the terms of the Investment Management Agreement

(“IMA”), MAM was currently entitled to receive a management

fee of 0.90% per annum of the Company’s market

capitalisation. Following the Remuneration Committee meeting

in February 2021, discussions had been held with MAM to link

the management fee to the size of the Company.

Accordingly, it was agreed that, with effect from 1 April 2021,

the management fee would be linked to the size of the

Company, as follows:

• 0.90% p.a. of the amount of the Company’s market

capitalisation up to £500 million;

• 0.75% p.a. of the amount of the Company’s market

capitalisation between £500 million and £750 million; and

• 0.65% p.a. of the amount of the Company’s market

capitalisation above £750 million.

In March 2022, the Remuneration Committee and the Board

formally reviewed the Manager’s appointment. In carrying out its

review, the Board considered the skills, experience, resources

and commitment of the Manager, together with the investment

performance during the year and since its appointment. It also

considered the length of the notice period of the investment

management agreement and the fees payable to the Manager.

Following this review, it is the Directors’ opinion that the

continuing appointment of Montanaro as Manager and AIFM,

on the terms agreed, is in the interests of shareholders as a

whole. Among the reasons for this view is the Company’s long-

term investment performance relative to that of the markets in

which the Company invests and the depth and experience of

the research capability of Montanaro. The Manager has also

performed well during the year where the market remained

adversely impacted by COVID-19 together with new implications

from the conflict in Ukraine and energy supply crisis.

DEPOSITARY AND CUSTODIAN

The Bank of New York Mellon (International) Limited acts as the

Company’s Depositary and Custodian in accordance with the

AIFM Directive. The Depositary’s responsibilities include cash

monitoring, segregation and safe keeping of the Company’s

financial instruments and monitoring the Company’s compliance

with investment limits and leverage requirements.

CAPITAL STRUCTURE

The Company’s capital structure is composed solely of Ordinary

Shares. The rights and obligations of shareholders are set out

in the Articles (which can be amended by special resolution). All

shares rank equally for dividends and entitlement to capital, and

at a general meeting of the Company every shareholder who is

present in person or by proxy or by a corporate representative

shall have one vote for all of the shares of which they are the

holder on a show of hands, and one vote for each share on a

poll. Unless the Board decides otherwise, no member is entitled

in respect of any share held by them to vote (either personally

or by proxy or by a corporate representative) at any general

meeting of the Company if any calls or other sums presently

page 26 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

payable by them in respect of that share remain unpaid or if

they are a person with a minimum of 0.25% interest (as defined

in the Articles) and they have been served with a restriction

notice (as defined in the Articles) after failure to provide the

Company with information concerning interests in those shares

required to be provided under the Companies Act 2006.

Subject to the provisions of the Companies Act 2006, the

Company may by ordinary resolution from time to time

declare dividends in accordance with the respective rights

of the members, but no dividend can exceed the amount

recommended by the Board.

Subject to the provisions of the Companies Act 2006, the

Board may pay such dividends as appear to it to be justified by

the financial position of the Company. The Board may deduct

from any dividend or other moneys payable to a member by

the Company on or in respect of any shares all sums of money

(if any) payable by them to the Company on account of calls

or otherwise in respect of shares of the Company. The Board

may also withhold payment of all or any part of any dividends

or other moneys payable in respect of the Company’s shares

from a person with a minimum of 0.25% interest (as defined in

the Articles) if such a person has been served with a restriction

notice (as defined in the Articles) after failure to provide the

Company with information concerning interests in those shares

required to be provided under the Companies Act 2006.

There are no restrictions on voting rights and no restrictions

concerning the transfer of shares in the Company except that

certain restrictions may from time to time be imposed by laws

and regulations (for example, insider trading laws). There are

no special rights with regard to control attached to securities;

no agreements between holders of securities regarding their

transfer known to the Company; and no agreements to which

the Company is a party that might change or fall away on a

change of control or trigger any compensatory payments for

Directors, following a successful takeover bid.

Share split

A proposal to implement a sub-division of the Company’s share

capital via a ten for one share split was approved at the Company’s

Annual General Meeting in September 2021. Following the sub-

division, each ordinary shareholder received ten new shares of

5 pence each for every one ordinary share of 50 pence each

previously held. It was noted that subsequent to the sub-division,

shareholders still held the same proportion of the Company’s

ordinary share capital as before the sub-division. Following the

completion of the share split, as at 14 September 2021, the

Company had 179,682,600 New Ordinary Shares in issue.

SUBSTANTIAL INTERESTS IN SHARE CAPITAL

As at 31 March 2022, the Company had received notification

of the following substantial holdings of voting rights (being

only those received under the Financial Conduct Authority’s

Disclosure Guidance and Transparency Rules):

Number of

shares held

Percentage

held

Hargreaves Lansdown, stockbrokers (EO) 30,244,696 15.97

Interactive Investor (EO) 25,223,025 13.32

AJ Bell, stockbrokers (EO) 10,014,007 5.29

Brewin Dolphin Ireland 9,158,123 4.83

Montanaro Asset Management 9,000,000 4.75

Brewin Dolphin, stockbrokers 7,901,304 4.17

Rathbones 6,145,267 3.24

Transact (EO) 5,805,446 3.06

The Company has not been advised of any changes to these

notified interests between 31 March 2022 and the date of

this report.

CORPORATE GOVERNANCE

Full details of the Company’s corporate governance

arrangements are given in the Corporate Governance

Statement, which forms part of this Directors’ Report and can

be found on pages 29 to 31.

ACCOUNTING AND GOING CONCERN

The financial statements start on page 46 and the unqualified

Independent Auditor’s Report on the financial statements is

on pages 39 to 45. Shareholders will be asked to approve the

Annual Report and Accounts at the AGM (Resolution 1). In

assessing the going concern basis of accounting, the Directors

have had regard to the guidance issued by the Financial

Reporting Council and have undertaken a rigorous review of the

Company’s ability to continue as a going concern.

The Directors have taken into account the Company’s

investment policy, which is described on pages 12 and 13 and

which is subject to regular Board monitoring processes and

is designed to ensure that the Company is invested mainly in

liquid, listed securities. The Company retains title to all assets

held by its custodian, and has financial covenants relating to its

bank borrowings with which it complied during the year.

As part of the going concern review, the Directors have also

considered the current cash position of the Company, the

availability of the fixed rate loan, the secured revolving credit

facility, compliance with the Company’s banking covenants,

the Company’s other liabilities and forecast revenues. In

particular, the Directors considered the impact of disruptions

arising from the global pandemic and recent market factors on

the company’s liquidity, market values, bank covenants and

continuity of operations.

Notes 16 to 20 to the accounts set out the financial risk profile

of the Company and indicate the effect on its assets and

liabilities of falls and rises in the value of securities, market rates

of interest and changes in exchange rates.

Directors’ Report continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 27

The Directors believe, in light of the controls and review

processes noted above and bearing in mind the nature of

the Company’s business and assets and liabilities, that the

Company has adequate resources to continue in operational

existence for a period of at least twelve months from the date

of approval of the accounts. For this reason, they continue to

adopt the going concern basis in preparing the accounts.

The Company’s longer term viability is considered in the

‘Viability Assessment and Statement’ on page 18.

FUTURE DEVELOPMENTS OF THE COMPANY

The outlook for the Company is set out in the Chairman’s

Statement on page 3.

GREENHOUSE GAS EMISSIONS

All of the Company’s activities are outsourced to third parties. As

such it does not have any physical assets, property, employees

or operations of its own and does not generate any greenhouse

gas or other emissions or consume any energy reportable

under the Companies Act 2006 (Strategic Report and Directors’

Report) Regulations 2013 or the Companies (Directors’ Report)

and Limited Liability Partnerships (Energy and Carbon Report)

Regulations 2018, implementing the UK Government’s policy

on Streamlined Energy and Carbon Reporting. Under listing rule

15.4.29(R), the Company, as a closed ended investment fund, is

exempt from complying with the Task Force on Climate related

Financial Disclosures. The Company is aware that the UK’s

Climate Change Act places obligations on the UK Government to

decarbonise the economy by 2050 and to manage the impacts

of climate change. Recognising the significance of the climate

crisis and our role in the UK’s response, we have been in active

dialogue with our fund manager to address sustainability risks.

Further details are provided in the ESG Report on pages 8 and 9.

DONATIONS

The Company made no political or charitable donations during

the year (2020: nil) to organisations either within or outside of

the EU.

LISTING RULE DISCLOSURE

Certain information is required to be included in the Annual

Financial Report by Listing Rule 9.8.4. The following table

provides references to where this information can be found

in this Annual Report. If a requirement is not shown, it is not

applicable to the Company.

Section Listing Rule requirement Location

Details of an allotment for

cash of equity securities

made during the period

Directors’ Report

(page 28 – new

issuance of shares)

FINANCIAL INSTRUMENTS

The Company’s financial instruments comprise its investment

portfolio, cash balances, bank debt and debtors and creditors

that arise directly from its operations, such as sales and

purchases awaiting settlement and accrued income. The

financial risk management objectives and policies arising from

its financial instruments and the exposure of the Company to

risk are disclosed in notes 16 to 20 to the accounts.

ANNUAL GENERAL MEETING

The notice of Annual General Meeting to be held on 8 September

2022 is set out on pages 70 to 77.

Directors’ Authority to Allot Shares (Resolution 9)

The Company’s Articles empower the Directors to allot

unissued shares. In accordance with section 551 of the

Companies Act 2006, such allotments must be authorised

by shareholders in a general meeting. Resolution 9 to be

proposed at the forthcoming Annual General Meeting renews

the Directors’ authority, granted by shareholders at last year’s

Annual General Meeting, to allot new shares under section

551 of the Companies Act 2006. This authority will allow the

Directors to allot shares up to an aggregate nominal amount

of £9 47,13 8 , representing an amount equal to approximately

10% of the Company’s total issued ordinary share capital as

at 23 June 2022 (being the latest practicable date before the

publication of the Annual Report and Accounts) excluding

shares held in treasury. This authority will expire at the

conclusion of the Company’s next Annual General Meeting, to

be held in 2023 or, if earlier, on 30 September 2023.

Directors’ Authority to Allot Shares other than on a

Pre-emptive Basis (Resolution 10)

Resolution 10 to be proposed at the Annual General Meeting

grants the Directors authority to allot new shares for cash and to

dispose of treasury shares, up to an aggregate nominal amount

of £9 47,13 8 , representing an amount equal to approximately

10% of the Company’s issued Ordinary Share capital (including

treasury shares) as at 23 June 2022, without having to offer such

shares to existing shareholders pro rata to their existing holdings.

The authority also allows the Directors to take such steps as

they consider necessary in relation to the treatment of overseas

shareholders, treasury shares and fractional entitlements

on pre-emptive share issues. This authority will expire at the

conclusion of the Company’s next Annual General Meeting to be

held in 2023 or, if earlier, on 30 September 2023 and will enable

the Company to issue new shares and to dispose of treasury

shares at any price for cash, including where shares are being

issued from treasury at a price representing a discount to the

NAV per share at the time of issue. The Directors will only allot

new shares pursuant to the authorities proposed to be conferred

by Resolutions 9 and 10 if they believe it is advantageous to the

Company’s shareholders to do so and in no circumstances would

it result in an overall dilution of the NAV per share. The Directors

page 28 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

will only issue new shares at a price representing at or a premium

to the NAV per share at the time of issuance. The Board’s policy

regarding the issue of shares from treasury is described below.

The Directors consider that the authorities proposed to be

conferred by Resolutions 9 and 10 are necessary to retain flexibility

and will be exercised only if, in the opinion of the Directors, it would

be in the best interests of shareholders as a whole.

Directors’ Authority to Buy Back Shares (Resolution 11)

The Company did not buy back any Ordinary Shares during

the year. The current authority of the Company to make

market purchases of up to 14.99% of the issued Ordinary

Shares expires at the end of the Annual General Meeting and

Resolution 11, as set out in the notice of the Annual General

Meeting, seeks renewal of such authority. The renewed

authority to make market purchases will be in respect of a

maximum of 14.99% of the issued Ordinary Shares of the

Company as at the date of the passing of the resolution,

excluding treasury shares (approximately 28,395,197 Ordinary

Shares). The resolution specifies the minimum and maximum

prices which may be paid for any Ordinary Shares purchased

under this authority. This power will only be exercised if, in

the opinion of the Directors, a purchase would result in an

increase in the NAV per share and be in the best interests of the

shareholders as a whole. The Board’s intention is to apply an

active discount management policy, and to 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.

As a result of the share split that took place following the 2021

AGM, the buyback authority taken represented approximately

1.4 per cent (rather than the previously represented 14.99 per

cent) of the issued share capital of the Company. While it is not

the Company’s intention to buy back Shares unless it is at a

discount to the NAV, it is important that the Company has the

requisite authority to operate its discount management policy if

necessary. Accordingly, the Directors’ put forward a resolution

to seek approval for a renewal of the Company’s buyback

authority for up to a number of shares that represent 14.99% of

the current issued share capital. This resolution was passed at

a General Meeting of the Company held on 22 February 2022.

TREASURY SHARES

Shares which are bought back by the Company pursuant to

the share buyback authority may be cancelled or held by the

Company in treasury and subsequently re-issued. It is the

Board’s intention that any shares bought back by the Company

will be held in treasury. Shares held in treasury will not carry

any voting rights, dividends payable in respect of them will be

suspended and they will have no entitlements on a winding-up

of the Company.

It is the Board’s policy that shares will only be re-issued from

treasury either at a price representing a premium to the NAV

per share at the time of re-issue, or at a discount to the NAV per

share provided that such discount is lower than the weighted

average discount to the NAV per share when they were bought

back by the Company. It is also the Board’s policy that shares

may be held in treasury indefinitely.

The Board believes that the treasury shares policy will

improve liquidity in the shares and help to maintain the size

of the Company. Furthermore, the Board believes that the

re-issuance of shares from treasury at a discount to the NAV

per share within the parameters described above will, in

conjunction with the Company’s share buyback policy, ensure

that the overall effect of the ‘round trip’ of repurchasing shares

and subsequently reissuing them from treasury will be an

enhancement to the NAV per share.

During the year, on 4 August 2021, owing to demand in the

market, the Company issued 10,000 Ordinary Shares of 50p

each fully paid from Treasury. Following the issuance there

was 17,448,260 Ordinary Shares in issue and no shares held in

Treasury. These shares were issued for cash on 4 August 2021

at a price of 2,020p per share.

There were further new share issuances in the year owing to

demand in the market, amounting to 14,945,000 shares.

As at 23 June 2022, being the latest practicable date before

the publication of the Annual Report and Accounts, there were

189,427,600 ordinary shares in issue. No shares are held in

treasury. Accordingly, the total number of voting rights in the

Company is 189,427,600. Further details are included under

Note 13 to the Financial Statements on page 58.

RECOMMENDATION

The Directors consider that the passing of each of the

resolutions to be proposed at the Annual General Meeting is

in the best interests of the Company and its shareholders as a

whole and they unanimously recommend that all shareholders

vote in favour of these resolutions.

INDIVIDUAL SAVINGS ACCOUNTS (‘ISAS’)

The Company’s shares are qualifying investments as defined by

HM Revenue & Customs’ regulations for ISAs. It is the intention of

the Directors that the Company will continue to conduct its affairs

to satisfy this requirement.

For and on behalf of the Board

LINK COMPANY MATTERS LIMITED

Company Secretary

23 June 2022

Directors’ Report continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 29

The Corporate Governance Statement forms part of the Directors’ Report.

INTRODUCTION

The Board has considered the Principles and Provisions of

the AIC Code of Corporate Governance published in February

2019 (AIC Code). The AIC Code addresses the Principles and

Provisions set out in the 2018 UK Corporate Governance Code

(the UK Code), as well as setting out additional Provisions on

issues that are of specific relevance to the Company.

The Board considers that reporting against the Principles and

Provisions of the AIC Code, which has been endorsed by the

Financial Reporting Council, provides more relevant information

to shareholders.

The AIC Code is available on the AIC website www.theaic.co.uk.

It includes an explanation of how the AIC Code adapts the

Principles and Provisions set out in the UK Code to make them

relevant for investment companies. The UK Code is available

from the Financial Reporting Council’s website at www.frc.org.uk.

During the year, the Company has complied with all of the

recommendations of the AIC Code.

The Company is committed to maintaining the highest

standards of governance and will ensure that it continues to

meet all applicable requirements.

THE CHAIRMAN OF THE COMPANY

Mr Curling was appointed to the Board as an independent

non-executive director in 2015, and as Chairman of the Board

on 29 August 2018. His biography can be found on page

23. Mr Curling is also a member of the Audit Committee and

Chairman of the Nomination Committee. The Board believes

it is appropriate for Mr Curling to be a member of both

committees as he is considered to bring valuable experience, to

be independent and there are no conflicts of interest.

THE COMPANY SECRETARY

The Board has direct access to the services of the Company

Secretary who is responsible for ensuring Board and

Committee procedures are followed and that applicable

regulations are complied with. The Company Secretary is also

responsible to the Board for ensuring the timely delivery of the

information and reports which the Directors require and that

statutory obligations are met.

THE BOARD

The Board consists solely of non-executive Directors. All

Directors are considered by the Board to be independent of the

Manager. Under the requirements of the Articles of Association,

Directors are subject to election at the next Annual General

Meeting after their appointment. New Directors receive an

induction from the Manager and Company Secretary on joining

the Board, and all Directors are encouraged to attend relevant

training courses and seminars.

Individual Directors may, at the expense of the Company, seek

independent professional advice on any matter that concerns

them in the furtherance of their duties. The Company maintains

appropriate Directors’ and officers’ liability insurance. The

Board is formed of three independent non-executive Directors.

Mr Curling is the Chairman of the Board and Chairman of the

Nomination Committee, Ms Roxburgh is Chair of the Audit

Committee and Senior Independent Director and Mr Neilly is

Chairman of the Remuneration Committee.

RE-ELECTION OF DIRECTORS

Under the provisions of the Company’s Articles, the Directors

retire by rotation at least every three years, however, in

accordance with corporate governance best practice as set out

in the AIC Code, all Directors should put themselves forward

for re-election every year. As such, each of the Directors is

subject to annual re-election by the shareholders at the Annual

General Meeting and Mr Curling, Ms Roxburgh and Mr Neilly

have confirmed that they will be standing for re-election at the

forthcoming Annual General Meeting.

BOARD INDEPENDENCE AND TENURE

The Board ensures that it has the appropriate balance of

skills, experience, knowledge and independence in order to

remain effective and regularly reviews the independence of its

members and considers all of the Directors to be independent.

In line with the 2019 AIC Code, the Company has adopted a

formal policy on tenure.

The Board does not feel that it would be appropriate to set a

specific tenure limit for individual Directors or the Chairman of

the Board or its Committees. Instead, the Board will regularly

review the size and structure of the Board with the aim of

new directors bringing the challenge of fresh thinking into the

Board’s discussions. By doing so, the Board intends to maintain

a broad range of experience in the Board, with Directors who

have served a range of periods on the Board of the Company.

This will ensure that on each occasion the Board enters into

new investment commitments, several members have direct

personal experience of negotiating previous commitments

with the Manager. This is intended to reserve the cumulative

experience and deep understanding of the Company, its

commitments and investment portfolio, while benefiting

from new perspectives and helping to promote diversity of

perspective. It is believed that the Directors provide, individually

and collectively, the breadth of skill and experience to manage

the Company and ensuring its long-term sustainable success.

The basis on which the Company aims to generate value over

the longer term is set out in the Business Model and Strategy

on pages 12 to 18.

Corporate Governance Statement

page 30 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

The Board currently meets at least four times a year and, in

addition, informally on a regular basis. It receives full information

on the Company’s investment performance, assets, liabilities

and other relevant information in advance of Board meetings.

The Board has approved a formal schedule of matters

reserved for it, including, but not limited to: overall strategy,

investment policy, capital structure, gearing and monitoring the

performance of the Manager.

The following table sets out the number of scheduled Board

and Committee meetings held during the year ended 31 March

2022 and the number of meetings attended by each Director.

Number of

meetings attended Board

Audit

Committee

Remuneration

Committee

Nomination

Committee

R M Curling 4/4 2/2 1/1 1/1

C A Roxburgh 4/4 2/2 1/1 1/1

G Neilly 4/4 2/2 1/1 1/1

In addition to the above meetings, the Board also met on two

separate occasions to discuss the issuance of shares and

to approve the Company’s blocklisting, both of which were

attended by all Directors. The Directors also met to discuss and

approve the share split transaction.

The Board also met informally on a number of occasions during

the year.

BOARD EFFECTIVENESS AND PERFORMANCE EVALUATION

During the year, the Directors undertook a formal and rigorous

performance evaluation and also considered the output from

the previous year’s evaluation. The process was led by the

Chairman and was designed to assess the strengths and

independence of the board together with the performance of

its committees, the Chairman and individual Directors.

The Board completed evaluation questionnaires which covered

a range of areas including processes and effectiveness, size and

composition, and corporate governance and were also intended

to analyse the focus of meetings and assess whether they are

appropriate, or if any additional information may be required

to facilitate future Board discussions. The evaluation of the

Chairman was carried out by the other Directors of the Company

and the process was led by the Senior Independent Director.

Last year, the evaluation identified a review of the Board

structure and succession planning as areas of focus for the

year ended 31 March 2021. This year’s evaluation reflects

progress in these areas and the Board will continue to keep

this under review. Output from the review also assists the

Board in its consideration of strategic areas of focus going

forward. The results of the Board evaluation process were

reviewed and discussed by the Board. Following evaluation,

the Board concluded that it had the appropriate balance of

skills, experience, length of service and knowledge and that the

Board and its committees continued to operate effectively.

The Board considered whether an external performance

evaluation should be undertaken in the future and has noted

that this is not a requirement under the AIC Code given the

Company is outside of the FTSE 350. The Board has taken

into account the costs and benefits associated with such an

exercise and does not consider the use of external consultants

to conduct this evaluation is likely to provide any meaningful

advantage over the process that has been adopted. However,

the option of doing so will be regularly reviewed.

VOTING POLICY ON PORTFOLIO INVESTMENTS

The Manager, in the absence of explicit instructions from the

Board, is empowered to exercise discretion in the use of the

Company’s voting rights. Environmental, social and governance

factors are taken into account by the Manager as part of its

investment analysis and decision making processes. The

Board is pleased that the Manager has been a signatory of

the UK Stewardship Code since its publication in 2010 and its

statement can be found on its website www.montanaro.co.uk.

In June 2019, Montanaro became a “B Corporation”, a business

certified for meeting the highest verified standards of social and

environmental performance, transparency and accountability.

COMMITTEES

The Board has established three committees to assist with

its operations. Throughout the year the following committees

have been in operation, namely the Audit Committee, the

Remuneration Committee and the Nomination Committee.

Each of the committees’ delegated responsibilities are clearly

defined in formal terms of reference which are available on the

Company’s website https://montanaro.co.uk/trust/montanaro-

european-smaller-companies-trust/.

AUDIT COMMITTEE

The Report of the Audit Committee is included on pages 32 to 34

and forms part of this statement. The Committee comprises the

full Board.

REMUNERATION COMMITTEE

The Remuneration Committee, chaired by Mr Neilly, comprises

the full Board and reviews the appropriateness of the Manager’s

continuing appointment and determines the level of Directors’

fees. The Directors’ Remuneration Report on pages 35 to 37

provides information on the remuneration arrangements for the

Directors of the Company.

Corporate Governance Statement continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 31

NOMINATION COMMITTEE AND BOARD DIVERSITY

The Nomination Committee, chaired by Mr Curling, comprises

the full Board and is convened for the purpose of considering

the appointment of new Directors as and when considered

appropriate and succession planning. The Board is composed

solely of non-executive Directors and has one third female

representation. Further details on performance evaluation is

included under the Board Effectiveness and Performance

Evaluation section of this Corporate Governance Statement.

The Company’s Board diversity policy is shown on page 13.

The Directors will ensure it adheres to set objectives in relation

to the diversity of the Board as and when they seek to appoint

additional Directors, in the future.

RELATIONS WITH SHAREHOLDERS

The Company welcomes the views of shareholders and places

great importance on communication with its shareholders. The

Manager holds meetings with the Company’s largest shareholders

and reports back to the Board on these meetings. The Chairman

and other Directors offer to meet with significant shareholders

every year and are available to meet other shareholders, if required.

The Annual General Meeting of the Company provides a forum,

both formal and informal, for shareholders to meet and discuss

issues with the Directors and the Manager of the Company. The

Annual Report and Accounts (which includes the Notice of Annual

General Meeting) is sent to shareholders at least 20 working days

before the Annual General Meeting in line with the FRC’s Guidance

on Board Effectiveness.

STATEMENT ON MODERN SLAVERY

In October 2015, the UK Government introduced the 2015 Modern

Slavery Act (the Act). As an Investment Trust, the Company does

not provide goods or services in the normal course of business,

and does not have customers or turnover. Accordingly, the

Directors consider that the Company is not in scope because

it does not have turnover and is therefore not required to make

any slavery or human trafficking statement under the Act. The

Company’s own supply chain which consists predominately of

professional advisers and service providers in the financial services

industry, is considered to be low risk in relation to this matter.

RISK MANAGEMENT AND INTERNAL CONTROLS

Details of the principal risks and internal controls applied by the

Board are set out on pages 15 to 17, and pages 32 and 33 of the

Audit Committee Report, respectively.

SHARE CAPITAL AND COMPANIES ACT DISCLOSURES

Details of the Company’s share capital structure and other

Companies Act 2006 disclosures and details of substantial

interests are set out on pages 25 and 26.

By order of the Board

LINK COMPANY MATTERS LIMITED

Company Secretary

65 Gresham Street

London

EC2V 7NQ

23 June 2022

page 32 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

COMPOSITION OF THE COMMITTEE

The Board recognises the requirement for the Audit Committee

as a whole to have competence relevant to the sector in which

the Company operates and at least one member with recent

and relevant experience.

The Audit Committee is chaired by Ms Roxburgh, a Chartered

Accountant, who has recent and relevant financial experience,

and the Committee operates within clearly defined terms of

reference and comprises all the Directors. Given the size of the

Board, and Mr Curling’s experience, it is felt appropriate for him

to sit on the Audit Committee as permitted by the AIC Code.

The Directors have a combination of financial, investment and

business experience, specifically with respect to the investment

trust sector.

ROLE OF THE COMMITTEE

The duties of the Audit Committee include reviewing: the

annual and interim financial statements; the system of internal

controls; and the terms of appointment and remuneration of

the Auditor, PricewaterhouseCoopers LLP (“PwC”) including its

independence and objectivity.

PwC was appointed as Auditor following shareholder approval

at the Annual General Meeting in September 2021. The Audit

Committee met twice during the year, with PwC in attendance

at both meetings and with the Company’s previous Auditor,

Ernst & Young LLP (“EY”) in attendance at the June 2021

meeting. The attendance of each of the members is set out

on page 30. In the course of its duties throughout the year, the

Committee had direct access to EY, PwC, Link Alternative Fund

Administrators (Link) and Montanaro. Amongst other things,

the Audit Committee considered and reviewed the following

matters and reported thereon to the Board:

• The annual and half-yearly reports and accounts and

results announcements;

• The accounting policies of the Company;

• The principal risks faced by the Company and the

effectiveness of the Company’s internal control and risk

management environment, including consideration of the

assumptions underlying the Board’s Viability Statement;

• The effectiveness of the audit process and related

non-audit services and the independence and objectivity

of PwC, its appointment, remuneration and terms

of engagement;

• The implications of proposed new accounting standards

and regulatory changes;

• The receipt of AAF (01/06) and ISAE 3402 reports or their

equivalent from the Manager, Administrator, Custodian and

other service providers; and

• Whether the Annual Report and Accounts is fair, balanced

and understandable.

RISK MANAGEMENT

The Board has established an ongoing process designed

to meet the particular needs of the Company in managing

the risks to which it is exposed, consistent with the related

guidance issued by the Financial Reporting Council.

Montanaro’s Compliance and Risk department and Link provide

regular control reports to the Audit Committee and the Board

covering administration, risk and compliance matters.

A key risk summary is produced to identify the risks to which

the Company is exposed, the controls in place and the actions

being taken to mitigate them. The Board has a robust process

for considering the resulting risk matrix and reviews the

significance of the risks, reasons for any change and actions

arising as a result.

The Company’s principal risks and their mitigations are set out

on pages 15 to 17, with additional information provided in notes

16 to 20 of the accounts.

The integration of these risks into the consideration of the

Viability Assessment and Statement on page 18 was also fully

considered by the Committee.

INTERNAL CONTROL

The Board is responsible for the Company’s systems of

internal controls and for reviewing their effectiveness. The Audit

Committee has reviewed and reported to the Board on these

controls which aim to ensure that the assets of the Company

are safeguarded, proper accounting records are maintained

and the financial information used within the business and for

publication is reliable.

The key procedures which have been established to provide an

effective internal control environment are outlined below:

• Board procedures are set within clearly defined

parameters, as set out in matters specifically reserved for

the Board.

• At every Board meeting the Directors review financial

information prepared by the Administrator, including

management accounts, forecasts of income and

expenditure and detailed analysis relating to the

performance of the Company.

• The Bank of New York Mellon (International) Limited, as the

Company’s Depositary, provides quarterly reports to the

Board and carries out daily independent checks on cash

and investment transactions.

• The Bank of New York Mellon SA/NV is responsible

for the custody of the Company’s investments. Lists

of investments held are reconciled to the Company’s

records on a regular basis and a report on controls,

which is reviewed by a firm of independent reporting

accountants, is produced annually for consideration by the

Audit Committee.

Report of the Audit Committee

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 33

• Investment management services are provided by

Montanaro, which is regulated by the Financial Conduct

Authority. At each Board Meeting the Board monitors the

investment performance of the Company in comparison

to its stated investment objective, the benchmark index

and comparable investment trusts. The Board also

reviews the Company’s activities since the last Board

Meeting to ensure that Montanaro adheres to the agreed

investment policy and approved investment guidelines.

On an annual basis, Montanaro produces an AAF 01/06

Report on internal controls, which is reviewed by a firm

of independent reporting accountants, and which is

then reviewed and considered by the Audit Committee.

Montanaro is also the Company’s AIFM and in this capacity

provides a quarterly report to the Board.

• Link are responsible for the provision of company

secretarial, accounting and administration services to the

Company. On an annual basis, Link produce an AAF 01/06

Report on internal controls, which is reviewed by a firm of

independent reporting accountants, for consideration by

the Audit Committee.

• The Board reviews contracts with other third party service

providers, including the standard of services provided, on a

regular basis.

A formal annual review of these procedures is carried out by

the Audit Committee. The review meeting is attended by the

Company’s Auditor. During the year, the Committee received

updates on any material changes in the risk environment

and regulatory requirements, and the action taken. These

procedures have been in place throughout the year and up

to the date of approval of the Annual Report and the Board is

satisfied with their effectiveness. The procedures are designed

to manage rather than eliminate risk and, by their nature, can

only provide reasonable, but not absolute, assurance against

material misstatement or loss.

The Board has previously reviewed the need for an internal

audit function. As an externally managed investment trust, it

has decided that the systems and procedures employed by the

Manager and the Administrator, including their risk management

and internal audit functions, provide assurance that a sound

system of internal control, which safeguards shareholders’

investment and the Company’s assets, is maintained. In

addition, reporting is also provided by the Depositary with

respect to their monitoring and oversight of the Company. An

internal audit function, specific to the Company, is therefore

considered unnecessary.

EXTERNAL AUDIT PROCESS AND SIGNIFICANT MATTERS

CONSIDERED BY THE AUDIT COMMITTEE

As part of its review of the scope and results of the audit,

during the year the Audit Committee considered and approved

PwC’s plan for the audit of the financial statements for the year

ended 31 March 2022. At the conclusion of the audit, PwC

did not highlight any issues to the Audit Committee which

would cause it to qualify its audit report nor did it highlight any

fundamental internal control weaknesses. PwC has issued an

unqualified audit report which is included on pages 39 to 45.

The significant issues considered by the Audit Committee are

discussed in the table on page 34.

NON-AUDIT SERVICES

The Committee regards the continued independence of the

auditor to be a matter of the highest priority. The Company’s

policy with regard to the provision of non-audit services by

the external auditor ensures that no engagement will be

permitted if:

• the provision of the services would contravene any

regulation or ethical standard;

• the auditor is not considered to be an expert provider of

the non-audit services;

• the provision of such services by the auditor creates a

conflict of interest for either the Board or the Manager; and

• the services are considered to be likely to inhibit the

auditor’s independence or objectivity as auditor.

As the Company is a Public Interest Entity listed on the London

Stock Exchange, with effect from 1 April 2017, under EU

legislation, a cap on the level of fees incurred for permissible

non-audit services now applies and should not exceed 70% of

the average audit fee for the previous three years.

The Committee amended its non-audit services policy in

2021 to reflect the requirements of the FRC’s Revised Ethical

Standard 2019, resulting in a ‘whitelist’ of permitted non-audit

services as opposed to the former approach of a ‘blacklist’ of

prohibited services.

page 34 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Significant Issues Considered by the Audit Committee in Relation to the Financial Statements

Matter Action

Investment Portfolio Valuation

The Company’s portfolio is invested in the

shares of European quoted smaller companies.

Errors in the portfolio valuation could have a

material impact on the Company’s net asset

value per share.

The Board reviews a full portfolio valuation at each Board meeting and, since the

implementation of the AIFM Directive in July 2014, receives regular reports from the

AIFM and the Depositary. The Audit Committee reviewed the Administrator’s annual

internal controls report, which is reported on by independent external accountants,

and which details the systems, processes and controls around the daily pricing of

securities, including the application of exchange rate movements.

Misappropriation of Assets

Misappropriation of the Company’s

investments or cash balances could have

a material impact on its net asset value

per share.

The Audit Committee reviewed the Administrator’s annual internal control report,

as referred to above, which details the controls around the reconciliation of the

Administrator’s records to those of the Custodian. The Audit Committee also

reviewed the Custodian’s annual internal controls report, which is reported on by

independent external accountants, and which provides details regarding its control

environment. As stated above, since the implementation of the AIFM Directive in

July 2014, the Board receives regular reports from the AIFM and the Depositary.

Section 1158 - Corporation Tax Act 2010

(“Section 1158”)

Ensuring the Company complies with the

Corporation Tax rules governing investment

trust status.

In determining dividend payments, the Board takes account of income forecasts,

brought forward revenue reserves, the Company’s dividend payment record and

the Corporation Tax rules governing investment trust status. These rules determine

the minimum level of dividend which must be paid in order to comply with Section

1158 in respect of the retention of distributable income. The Company complies at all

times with Section 1158 such that it does not suffer UK Corporation Tax on capital

gains; and ensures that it submits correct taxation returns annually to HMRC and

settles promptly any taxation due.

Income Recognition

Incomplete or inaccurate income recognition,

including allocation between revenue and

capital, could have an adverse effect on the

Company’s net asset value and earnings per

share and its level of distributable revenue.

The Audit Committee reviewed the Administrator’s annual internal controls report,

as referred to above, which details the systems, processes and controls around the

recording of investment income. It also compared the final level of income received

for the year to the budget which was set at the start of the year and considered the

accounting treatment of all special dividends received with the Manager.

Annual Report and Accounts

Ensuring the Annual Report and Accounts is

fair, balanced and understandable.

The Audit Committee read and discussed this Annual Report and Accounts and

advised the Board that it is fair, balanced and understandable and provides the

information necessary for shareholders to assess the Company’s position and

performance, business model and strategy.

Report of the Audit Committee continued

AUDITOR ASSESSMENT, INDEPENDENCE AND APPOINTMENT

Under mandatory audit rotation rules, the Company is required

to put the external audit out to tender at least every ten years.

In accordance with the EU regulations and transitional

provisions, in 2021 the Committee undertook a robust tender

process and, following this process, a recommendation based

on quality, knowledge and experience was made to appoint

PricewaterhouseCoopers LLP as Auditor for the financial

year ending 31 March 2022. Shareholder approval for the

appointment was sought and granted at the 2021 AGM, and

PwC was appointed as at this date.

The Audit Committee reviews the re-appointment of the auditor

every year. As part of this year’s review of auditor independence

and effectiveness, PwC has confirmed that it is independent of the

Company and has complied with relevant auditing standards. In

evaluating PwC, the Audit Committee has taken into consideration

the standing, skills and experience of the firm and the audit team.

The Audit Committee, from direct observation and enquiry of the

Administrator, remains satisfied that PwC continues to provide

effective independent challenge in carrying out its responsibilities.

PwC’s fee in respect of the audit for the year ended 31 March

2022 is £45,000 (EY’s fee in 2021: £38,000). The increase in fees

from the previous year are a result of factors impacting the audit

market, such as increasing costs of doing business and transition

costs arising from the move from the previous auditor, EY, to PwC.

Following professional guidelines, the audit partner rotates after

five years. The year ended 31 March 2022 is Shujaat Khan’s

first year as audit partner.

By Order of the Board

C A ROXBURGH

Chair of the Audit Committee

23 June 2022

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 35

Directors’ Remuneration Report

The Board consists solely of independent non-executive

Directors. The Company has no executive Directors or

employees. The level of Directors’ fees is determined by the

Remuneration Committee, in accordance with the AIC Code

of Corporate Governance, and within the limits defined in the

Articles of Association and approved by shareholders. Full details

of the Company’s policy with regards to Directors’ fees, and fees

paid during the year ended 31 March 2022, are shown below

and on page 36. This shows all major decisions on Directors’

remuneration and any substantial changes made during the

year relating to Directors’ remuneration, including the context in

which any changes occurred. Under company law, the Auditor is

required to audit certain disclosures provided. Where disclosures

have been audited they are indicated as such. The Auditor’s

opinion is included in its report on pages 39 to 45.

The Remuneration Committee is chaired by Mr Neilly. As the

Company has no executive Directors, the Committee meets

annually to determine the level of Directors’ fees and to review

the performance of the Manager. The Company Secretary

provides information on comparative levels of Directors’ fees

to the Remuneration Committee in advance of each review.

The outcome of the review of the Manager can be found

on page 25. No director is involved in deciding their own

remuneration outcome.

ANNUAL STATEMENT FROM THE CHAIR OF THE

REMUNERATION COMMITTEE (THE "COMMITTEE")

I am pleased to present the Directors’ Remuneration Report for

the year ended 31 March 2022.

During the year, the Committee reviewed the Remuneration

Policy and the Directors' fees. The outcomes of each of these

reviews can be found below.

Directors’ Remuneration Policy

The existing Directors’ remuneration policy was approved at

the Company’s Annual General Meeting in 2020. The policy

will remain in force until the Annual General Meeting of the

Company in 2023, at which time a further resolution will

be proposed.

The Company’s policy is to remunerate Directors exclusively

by fixed fees in cash at a rate which should reflect the

responsibilities of being a non-executive Director, including the

potential liabilities associated with the position, and the time

committed by them to these responsibilities including, where

appropriate, Board Committee duties. There were no changes

to the policy during the year.

The fees for the non-executive Directors are determined within

the limits set out in the Company’s Articles of Association. The

present limit is £200,000 in aggregate per annum and may

not be changed without seeking shareholder approval at a

general meeting. There is no performance related remuneration

scheme and therefore non-executive Directors are not eligible

for bonuses, pension benefits, share options, long-term

incentive schemes or other benefits. Directors do not have

service contracts, but new Directors are provided with a letter

of appointment. These letters of appointment are available for

inspection at the Company’s registered office. The terms of

Directors’ appointments provide that they should retire and be

subject to election at the next Annual General Meeting after

their appointment. Under the terms of the Company’s Articles

of Association, Directors are obliged to offer themselves for

re-election by shareholders by not later than the third Annual

General Meeting after they were last elected. However, the

Board has agreed that all Directors will retire annually and,

if appropriate, seek re-election. There is no notice period

and no provision for compensation upon early termination

of appointment.

The Company has not received any views from its shareholders

in respect of the levels of Directors’ remuneration. Any

such views expressed by shareholders will be taken into

consideration by the Board when reviewing the Directors’

Remuneration Policy and in the annual review of Directors’

fees. It is intended that the policy will continue for the three year

period ending at the AGM in 2023.

Directors’ Remuneration Policy – Voting at Annual

General Meeting

The Directors’ Remuneration Policy was last approved by

shareholders at the Company’s Annual General Meeting, held

on 10 September 2020. 99.84% of votes were in favour of the

resolution and 0.16% of votes were against. 0.05% of votes

were withheld.

Future Policy Table

Following a review of the level of Directors’ fees, the

Remuneration Committee concluded that, commencing 1 April

2022, the Chairman’s fee be increased to £39,000 per annum,

the Audit Committee Chairman’s fee be increased to £33,500

per annum and other Directors’ fees be increased to £28,000

per annum, the last increase having been made on 1 April

2021. These changes have been made following consideration

of Directors’ remuneration in the context of its peers and the

wider investment trust sector, as well as the increased time

commitment of Directors in order to fulfil their duties.

Based on these fees, Directors’ fees for the forthcoming

financial year would be as follows:

31 March 2023 31 March 2022

Chairman £39,000 £36,050

Audit Committee Chairman £33,500 £30,900

Director £28,000 £25,750

page 36 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Approach to Recruitment Remuneration

The principle adopted by the Committee in respect of

recruitment of Directors is that the fees for a non-executive

Director should reflect the responsibilities and time commitment

required. The Committee seeks to encourage the enhancement

of the Company’s performance and to ensure that remuneration

packages offered are competitive and designed to attract,

retain and motivate Directors of the right calibre. Any new

non-executive Director would be paid on the same basis as the

existing non-executive Directors. As noted above the aggregate

level of Directors’ fees must not exceed a set limit, as set out

in the Company’s articles of association, which is currently

£200,000 per annum.

ANNUAL REPORT ON DIRECTORS’ REMUNERATION

Directors’ Emoluments for the Year (audited)

The Directors who served during the financial year received

the following amounts for services as non-executive Directors

for the years ended 31 March 2022 and 2021 as well as

reimbursement for expenses necessarily incurred. No other

forms of remuneration were paid during the year.

The requirements to disclose this information came into force

for companies with financial years starting on or after 10 June

2019 and, as such, this is the second year the Company has

disclosed this information. The comparison will be expanded

in future annual reports until such time as it covers a five

year period.

The Company does not have any employees and therefore no

comparisons are given in respect of Directors’ and employees’

pay increases.

Statement of implementation of Remuneration Policy in

respect of the financial year ending 31 March 2023

The Committee will, as usual, review Directors’ fees during

2022/23, including the time required to be committed to the

business of the Company, and will consider whether any further

changes to remuneration are required.

Fees for services to the Company (audited)

Fees

Tax able

Benefits^

Total

Total fixed

remuneration

Total variable

remuneration

2022 2021 2022 2021 2022 2021 2022 2021 2022 2021

R M Curling

36,050

35,000

1,675

–

37,725

35,000

37,725

35,000

1,675

–

C A Roxburgh

30,900

30,000

672

–

31,572

30,000

31,572

30,000

672

–

M R Somerset Webb*

–

18,750

–

18,750

–

18,750

–

G Neilly**

25,750

13,269

396

–

26,146

13,269

26,146

13,269

396

–

Total

92,700

97,019

2,743

–

95,443

97,019

95,443

97,019

2,743

–

* Retired on 31 December 2020.

** Appointed on 21 September 2020.

^ Comprises amounts reimbursed for expenses incurred in carrying out business for the Company, which have been grossed up to include PAYE and NI Contributions.

No sums are paid to any third parties in respect of Directors' services and no sums were paid to any third parties in respect of advice

from remuneration advisors. There have been no payments to past Directors during the financial year ended 31 March 2022, whether

for loss of office or otherwise.

Annual percentage change in remuneration of directors

Directors’ pay has increased over the last three years, as set out in the table below:

2022

Change

2021

Change

2020

Chairman 36,050 3 35,000 9 32,000

Audit Committee Chairman 30,900 3 30,000 11 27,000

Director 25,750 3 25,000 9 23,000

Directors’ Remuneration Report continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 37

Relative Importance of Expenditure on Pay

As the Company has no employees, the table above represents

the total remuneration costs and benefits paid by the Company.

To enable shareholders to assess the relative importance of

expenditure on Directors’ remuneration, the table below shows

the actual expenditure during the year in relation to Directors’

remuneration (excluding taxable benefits), other operating

expenses and shareholder distributions:

2022

2021

Change

Aggregate Directors'

Remuneration 95,443 97,019 (1.6)

Management and other

operating expenses* 3,728,000 2,834,000 31.5

Dividends paid to

shareholders 1,637,000 1,555,000 5.3

* Includes Directors’ remuneration.

Directors’ Shareholdings (audited)

There is no requirement under the Articles of Association for

Directors to hold shares in the Company. The Directors who

held office during the year and their interests in the shares of the

Company were as follows:

As at

31 March 2022*

No. of shares

restated for

share split

As at

1 April 2021

No. of shares

R M Curling Beneficial 100,000 100,000 10,000

C A Roxburgh

Beneficial 61,885 57,280 5,728

G Neilly Beneficial 61,496 61,280 6,128

^ Includes 3,580 shares held in Ms Roxburgh’s spouse’s name

* 10:1 Share Split effective on 14 September 2021

There have been no changes in the Directors’ interests in the

shares of the Company between 31 March 2022 and the date

of this Annual Report.

Company Performance

The Board is responsible for the Company’s investment strategy

and performance, although the management of the Company’s

investment portfolio is delegated to Montanaro through the

investment management agreement, as referred to in the

Directors’ Report on page 25. The graph below compares,

for the ten financial years ended 31 March 2022, the share

price total return (assuming all dividends are reinvested) to

shareholders compared to the return from the benchmark

index. An explanation of the performance of the Company

for the year ended 31 March 2022 is given in the Chairman’s

Statement and the Manager’s Report.

Total Return and Benchmark Performance*

(rebased at 100 on 31 March 2012, GBP)

100

300

500

250

400

450

350

200

2012 2013 2014 2015 2016 2017 2018 2022202120202019

Share Price Total Return

Benchmark Total Return

150

* From 5 September 2006: MSCI Europe SmallCap Index. The benchmark

was changed on 1 June 2009 to the MSCI Europe ex-UK SmallCap Index

(in Sterling terms). This benchmark was selected because it is the most

commonly used index for SmallCap investors.

Annual Report on Directors’ Remuneration – Voting at

Annual General Meeting

At the Company’s last Annual General Meeting, held on

9 September 2021, shareholders approved the Annual Report

on Directors’ Remuneration for the year ended 31 March 2021.

99.73% of votes were in favour of the resolution and 0.27%

were against. 0.43% were withheld.

An ordinary resolution for the approval of this Annual Report

on Directors’ Remuneration will be put to shareholders at the

forthcoming Annual General Meeting.

By Order of the Board

G NEILLY

Director

23 June 2022

page 38 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Management Report and Directors’ Responsibilities Statement

MANAGEMENT REPORT

Listed companies are required by the Financial Conduct

Authority’s Disclosure Guidance and Transparency Rules (the

‘Rules’) to include a management report in their annual financial

statements. The information required to be in the management

report for the purpose of the Rules is included in the Chairman’s

Statement (pages 2 and 3), the Manager’s Report (pages 4 to 7),

Twenty Largest Holdings (pages 10 and 11), the Business Model

and Strategy (pages 12 to 18) and the Directors’ Report (pages

24 to 28). Therefore, a separate management report has not

been included.

DIRECTORS’ RESPONSIBILITIES STATEMENT IN RELATION

TO THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report

and Accounts and the financial statements in accordance with

applicable law and regulation.

Company law requires the Directors to prepare financial

statements for each financial year. Under that law the Directors

have prepared the financial statements in accordance with

UK-adopted international accounting standards.

Under company law, 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 the financial

statements, the Directors are required to:

• select suitable accounting policies and then apply them

consistently;

• state whether applicable UK-adopted international

accounting standards have been followed, subject to any

material departures disclosed and explained in the financial

statements;

• make judgements and accounting estimates that are

reasonable and prudent; 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 safeguarding the assets of

the company and hence for taking reasonable steps for the

prevention and detection of fraud and other irregularities.

The Directors are also 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 and the Directors’

Remuneration Report comply with the Companies Act 2006.

The Directors are responsible for the maintenance and integrity

of the company’s website. Legislation in the United Kingdom

governing the preparation and dissemination of financial

statements may differ from legislation in other jurisdictions.

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 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;

• 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

Chairman

23 June 2022

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 39

Independent Auditor’s Report

to the Members of Montanaro European Smaller Companies Trust plc

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS

OPINION

In our opinion, Montanaro European Smaller Companies Trust plc’s financial statements:

• give a true and fair view of the state of the Company’s affairs as at 31 March 2022 and of its return and cash flows for the year

then ended;

• have been properly prepared in accordance with UK-adopted international accounting standards; and

• have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise:

the Balance Sheet as at 31 March 2022; the Statement of Comprehensive Income, Statement of Cash Flows, Statement of

Changes in Equity for the year then ended; and the notes to the financial statements, which include a description of the significant

accounting policies.

Our opinion is consistent with our reporting to the Audit Committee.

BASIS FOR OPINION

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our

responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section

of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We remained independent of the Company in accordance with the ethical requirements that are relevant to our audit of the

financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we

have fulfilled our other ethical responsibilities in accordance with these requirements.

To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not

provided.

We have provided no non-audit services to the Company in the period under audit.

OUR AUDIT APPROACH

Context

Montanaro European Smaller Companies Trust plc is an Investment Trust Company listed on the London Stock Exchange and

invests primarily in equities quoted on Continental European investment markets. The operations of the Company are located in

the UK. We focus our audit work primarily on the valuation and existence of investments and income from investments.

Overview

Audit scope

• The Company is a standalone Investment Trust Company and engages Montanaro Asset Management Limited (the

‘Manager’) to manage its assets.

• We conducted our audit of the financial statements using information from Link Alternative Fund Administrators Limited, (the

‘Administrator’) to whom the Manager has, with the consent of the Directors, delegated the provision of certain administrative

functions.

• We tailored the scope of our audit taking into account the types of investments within the Company, the involvement of the

third parties referred to above, the accounting processes and controls, and the industry in which the Company operates.

• We obtained an understanding of the control environment in place at both the Manager and the Administrator and adopted a

fully substantive testing approach using reports obtained from the Administrator.

page 40 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Key audit matters

• Valuation and existence of investments.

• Accuracy, occurrence and completeness of investment income.

Materiality

• Overall materiality: £3,249,054 based on 1% of net assets.

• Performance materiality: £2,436,791.

The scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.

Key audit matters

Key audit matters are those matters that, in the Auditors’ professional judgement, were of most significance in the audit of the

financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not

due to fraud) identified by the Auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of

resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results

of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our

opinion thereon, and we do not provide a separate opinion on these matters.

This is not a complete list of all risks identified by our audit.

Key audit matter How our audit addressed the key audit matter

Valuation and existence of investments

Refer to the Accounting Policies (pages 50 to

53) and the Notes to the financial statements

(page 56).

The investment portfolio at the year-end

comprised listed equity investments valued at

£339.7 million.

We focused on the valuation and existence of

investments because investments represent

the principal element of the net asset value

as disclosed in the Statement of Financial

Position in the financial statements.

We assessed the accounting policy for the valuation of investments for compliance

with accounting standards and performed testing to check that investments are

accounted for in accordance with this stated accounting policy.

We tested the valuation of all the listed equity investments by agreeing the prices

used in the valuation to independent third party sources.

We tested the existence of all the investments by agreeing investment holdings to

an independent confirmation.

No material issues were identified.

Independent Auditor’s Report continued

to the Members of Montanaro European Smaller Companies Trust plc

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 41

Key audit matter How our audit addressed the key audit matter

Accuracy, occurrence and completeness of

investment income

Refer to page 51 (Accounting Policies) and

page 53 (Notes to the Financial Statements).

For the Company we consider that ‘income’

refers to both revenue and capital (including

gains and losses on investments).

We focused on the accuracy, occurrence

and completeness of investment income as

incomplete or inaccurate income could have

a material impact on the Company’s net asset

value and dividend cover.

We also focused on the accounting policy for

income recognition and its presentation in the

Statement of Comprehensive Income as set

out in the requirements of The Association

of Investment Companies Statement of

Recommended Practice (the ‘AIC SORP’)

as incorrect application could indicate a

misstatement in income recognition.

We found that the accounting policies implemented were in accordance with

accounting standards and the AIC SORP, and that income has been accounted for

in accordance with the stated accounting policy.

The gains/losses on investments held at fair value through profit or loss comprise

realised and unrealised gains/losses. For unrealised gains and losses, we sample

tested the valuation of the portfolio at the year-end, together with testing the

reconciliation of opening and closing investments. For realised gains/losses, we

tested a sample of disposal proceeds by agreeing the proceeds to bank statements

and we re-performed the calculation of a sample of realised gains/losses.

We tested the accuracy of dividend receipts by agreeing the dividend rates from

investments to independent third-party data.

To test for occurrence, we confirmed that all dividends recorded had occurred in the

market to independent third-party data, and traced a sample of cash payments to

bank statements.

To test for completeness, we tested that the appropriate dividends had been

received in the year by reference to independent third party data of dividends

declared for all listed investments during the year.

We also tested the allocation and presentation of dividend income between the

revenue and capital return columns of the Statement of Comprehensive Income in

line with the requirements set out in the AIC SORP by confirming reasons behind

dividends.

No material issues were identified.

How we tailored the audit scope

We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial

statements as a whole, taking into account the structure of the Company, the accounting processes and controls, and the

industry in which it operates.

Materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These,

together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our

audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both

individually and in aggregate on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Overall Company materiality £3,249,054

How we determined it 1% of net assets

Rationale for benchmark applied We have applied this benchmark, which is a generally accepted auditing practice

for investment trust audits.

We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and

undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of

our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in

determining sample sizes. Our performance materiality was 75% of overall materiality, amounting to £2,436,791 for the Company

financial statements.

In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment

and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was

appropriate.

page 42 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £162,453 as

well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

CONCLUSIONS RELATING TO GOING CONCERN

Our evaluation of the directors’ assessment of the Company’s ability to continue to adopt the going concern basis of accounting

included:

• evaluating the Directors’ updated risk assessment and considering whether it addressed the relevant threats to the Company;

• evaluating the Directors’ assessment of potential operational impacts to the Company of relevant risks, considering their

consistency with other available information and our understanding of the business and assessed the potential impact on the

financial statements;

• reviewing the Directors’ assessment of the Company’s financial position in the context of its ability to meet future expected

operating expenses, their assessment of liquidity as well as their review of the operational resilience of the Company and

oversight of key third-party service providers; and

• assessing the implication of potential significant reductions in NAV as a result of market movements on the ongoing ability of

the Company to operate.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,

individually or collectively, may cast significant doubt on the Company’s ability to continue as a going concern for a period of at

least twelve months from when the financial statements are authorised for issue.

In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the

preparation of the financial statements is appropriate.

However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the Company's

ability to continue as a going concern.

In relation to the Directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to

add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it

appropriate to adopt the going concern basis of accounting.

Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of

this report.

REPORTING ON OTHER INFORMATION

The other information comprises all of the information in the Annual Report other than the financial statements and our Auditors’

report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the

other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this

report, any form of assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so,

consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the

audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement,

we are required to perform procedures to conclude whether there is a material misstatement of the financial statements

or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a

material misstatement of this other information, we are required to report that fact. We have nothing to report based on these

responsibilities.

With respect to the Strategic report and Directors' Report, we also considered whether the disclosures required by the UK

Companies Act 2006 have been included.

Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and

matters as described below.

Independent Auditor’s Report continued

to the Members of Montanaro European Smaller Companies Trust plc

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 43

Strategic report and Directors’ Report

In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors'

Report for the year ended 31 March 2022 is consistent with the financial statements and has been prepared in accordance with

applicable legal requirements.

In light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we did not

identify any material misstatements in the Strategic report and Directors' Report.

Directors’ Remuneration

In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the

Companies Act 2006.

CORPORATE GOVERNANCE STATEMENT

The Listing Rules require us to review the Directors’ statements in relation to going concern, longer-term viability and that part of

the corporate governance statement relating to the Company’s compliance with the provisions of the UK Corporate Governance

Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other

information are described in the Reporting on other information section of this report.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate

governance statement is materially consistent with the financial statements and our knowledge obtained during the audit, and we

have nothing material to add or draw attention to in relation to:

• The Directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks;

• The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging

risks and an explanation of how these are being managed or mitigated;

• The Directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern

basis of accounting in preparing them, and their identification of any material uncertainties to the Company’s ability to

continue to do so over a period of at least twelve months from the date of approval of the financial statements;

• The Directors’ explanation as to their assessment of the Company’s prospects, the period this assessment covers and why

the period is appropriate; and

• The Directors’ statement as to whether they have a reasonable expectation that the Company will be able to continue in

operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing

attention to any necessary qualifications or assumptions.

Our review of the Directors’ statement regarding the longer-term viability of the group was substantially less in scope than an

audit and only consisted of making inquiries and considering the Directors’ process supporting their statement; checking that

the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the

statement is consistent with the financial statements and our knowledge and understanding of the Company and its environment

obtained in the course of the audit.

In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the

corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit:

• The Directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and

provides the information necessary for the members to assess the Company's position, performance, business model and

strategy;

• The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and

• The section of the Annual Report describing the work of the Audit Committee.

We have nothing to report in respect of our responsibility to report when the Directors’ statement relating to the Company’s

compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing

Rules for review by the Auditors.

page 44 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT

Responsibilities of the Directors for the financial statements

As explained more fully in the Directors’ Responsibilities Statement in Relation to the Financial Statements, the Directors are

responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that

they give a true and fair view. The Directors are also responsible for such internal control as they determine is necessary to enable

the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue as a going

concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the

Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

Auditors’ responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material

misstatement, whether due to fraud or error, and to issue an Auditors’ report that includes our opinion. Reasonable assurance is a

high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material

misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the

aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial

statements.

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our

responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which

our procedures are capable of detecting irregularities, including fraud, is detailed below.

Based on our understanding of the Company and industry, we identified that the principal risks of non-compliance with laws

and regulations related to breaches of section 1158 of the Corporation Tax Act 2010, and we considered the extent to which

non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that

have a direct impact on the financial statements such as the Companies Act 2006. We evaluated management’s incentives and

opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that

the principal risks were related to posting inappropriate journal entries to increase revenue (investment income and capital gains)

or to increase net asset value. Audit procedures performed by the engagement team included:

• discussions with the Manager and Audit Committee, including consideration of known or suspected instances of

non-compliance with laws and regulation and fraud;

• reviewing relevant committee meeting minutes, including those of the Board and Audit Committee;

• assessment of the Company’s compliance with the requirements of section 1158 of the Corporation Tax Act 2010, including

recalculation of numerical aspects of the eligibility conditions;

• review of financial statement disclosures to underlying supporting documentation;

• identifying and testing manual journal entries posted by the Administrator during the preparation of the financial statements; and

• designing audit procedures to incorporate unpredictability around the nature, timing or extent of our testing.

There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-

compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements.

Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error,

as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.

Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing

techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations.

We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit

sampling to enable us to draw a conclusion about the population from which the sample is selected.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:

www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditors’ report.

Independent Auditor’s Report continued

to the Members of Montanaro European Smaller Companies Trust plc

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 45

Use of this report

This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with

Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume

responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save

where expressly agreed by our prior consent in writing.

OTHER REQUIRED REPORTING

Companies Act 2006 exception reporting

Under the Companies Act 2006 we are required to report to you if, in our opinion:

• we have not obtained all the information and explanations we require for our audit; or

• adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received

from branches not visited by us; or

• certain disclosures of Directors’ remuneration specified by law are not made; or

• the financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the

accounting records and returns.

We have no exceptions to report arising from this responsibility.

Appointment

Following the recommendation of the Audit Committee, we were appointed by the members on 9 September 2021 to audit

the financial statements for the year ended 31 March 2022 and subsequent financial periods. This is therefore our first year of

uninterrupted engagement.

SHUJAAT KHAN (Senior statutory auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

Edinburgh

23 June 2022

page 46 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Statement of Comprehensive Income

for the year ended 31 March 2022

Year to 31 March 2022 Year to 31 March 2021

Notes

Revenue

£’000

Capital

£’000

Total

£’000

Revenue

£’000

Capital

£’000

Total

£’000

Capital gains/(losses) on investments

Gains on investments held at fair value 9 – 18,806 18,806 – 108,742 108,742

Exchange losses – (264) (264) – (109) (109)

Revenue

Investment income 2 3,788 – 3,788 2,166 – 2,166

Total income 3,788 18,542 22,330 2,166 108,633 110,799

Expenditure

Management expenses 3 (1,092) (2,028) (3,120) (766) (1,422) (2,188)

Other expenses 4 (570) (38) (608) (646) – (646)

Total expenditure (1,662) (2,066) (3,728) (1,412) (1,422) (2,834)

Return before finance costs and taxation 2,126 16,476 18,602 754 107,211 107,965

Finance costs 5 (56) (104) (160) (56) (105) (161)

Return before taxation 2,070 16,372 18,442 698 107,106 107,804

Taxation 6 (348) – (348) (169) – (169)

Return after taxation 1,722 16,372 18,094 529 107,106 107,635

Return per share* 8 0.96p 9.09p 10.05p 0.31p 63.24p 63.55p

The total column of this statement represents the Company’s Income Statement and Statement of Comprehensive Income,

prepared to International Accounting Standards in conformity with the Companies Act 2006.

The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of

Investment Companies.

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

No operations were acquired or discontinued in the year.

The accompanying notes are an integral part of the financial statements.

* In accordance with IAS 33 ‘Earnings per Share’, the comparative return per ordinary share figures have been restated using the new number of shares in issue

following the ten for one share split. For weighted average purposes, the share split has been treated as happening on the first day of the accounting period. See

note 13 for further details.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 47

Balance Sheet

as at 31 March 2022

31 March 2022

31 March 2021

Notes

£’000 £’000

Non-current assets

Investments held at fair value through profit and loss 9

339,788 282,575

Current assets

Trade and other receivables 10

967 782

Cash and cash equivalents 10 1,821 1,767

2,788 2,549

Total assets 342,576 285,124

Current liabilities

Trade and other payables 11

(787) (564)

Revolving credit facility 11 (8,450) –

(9,237) (564)

Non-current liabilities

Interest-bearing bank loan 12

(8,434) (8,495)

Total liabilities (17,671) (9,059)

Net assets 324,905 276,065

Capital and reserves

Called-up share capital 13

9,471 8,724

Share premium account 44,057 12,707

Capital redemption reserve 2,212 2,212

Capital reserve 265,843 249,185

Revenue reserve 3,322 3,237

Total shareholder's fund 324,905 276,065

Net asset value per share* 14 171.5p 158.9p

The financial statements on pages 46 to 62 were approved and authorised for issue by the Board of Directors on 23 June 2022

and signed on its behalf by:

R CURLING

Director

Company Registered Number: SC074677

The accompanying notes are an integral part of the financial statements.

* The comparative NAV figures have been restated using the new number of shares in issue following the ten for one share split. Restating the NAVs following the

share split allows the reader to see how the NAVs have evolved. See note 13 for further details.

page 48 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Statement of Changes in Equity

for the year ended 31 March 2022

Year to 31 March 2022 Notes

capital

£’000

premium

account

£’000

Capital

redemption

reserve

£’000

Capital

reserve

£’000*

Revenue

reserve

£’000*

Total

£’000

As at 1 April 2021 8,724 12,707 2,212 249,185 3,237 276,065

Return after taxation – – – 16,372 1,722 18,094

Share issues 747 31,350 – 286 – 32,383

Dividends paid 7 – – – – (1,637) (1,637)

As at 31 March 2022 9,471 44,057 2,212 265,843 3,322 324,905

Year to 31 March 2021

Notes

capital

£’000

premium

account

£’000

Capital

redemption

reserve

£’000

Capital

reserve

£’000*

Revenue

reserve

£’000*

Total

£’000

Balance at 1 April 2020 8,724 5,283 2,212 139,641 4,263 160,123

Return after taxation – – – 107,106 529 107,635

Share issues – 7,424 – 2,438 – 9,862

Dividends paid 7 – – – – (1,555) (1,555)

Balance at 31 March 2021 8,724 12,707 2,212 249,185 3,237 276,065

The accompanying notes are an integral part of the financial statements.

* These reserves, excluding any unrealised capital reserve are distributable. As at 31 March 2022 distributable reserves totalled £125,714,000 (2021: £115,325,000).

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 49

Statement of Cash Flows

for the year ended 31 March 2022

31 March 2022

31 March 2021

Notes

£’000

Cash flows from operating activities

Return before taxation

18,442 107,804

Investment gains (18,806) (108,742)

Exchange losses 264 109

Finance costs 160 161

Withholding tax (348) (136)

Investment income (3,788) (2,166)

Dividends received 3,838 2,056

(Increase)/decrease in receivables (197) 3

Increase in payables 30 346

Purchases of investments (75,661) (57,443)

Sales of investments 37,583 52,578

Net cash outflow from operating activities (38,483) (5,430)

Cash flows from financing activities

Drawdowns/(repayments) of loans

8.394 (866)

Proceeds from the issue of shares 32,383 9,862

Dividends paid 7 (1,637) (1,555)

Interest paid (155) (164)

Share split costs (38) –

Net cash inflow from financing activities 38,947 7,277

Net increase in cash and cash equivalents 464 1,847

Exchange losses (410) (485)

Increase in cash and cash equivalents 54 1,362

Cash and cash equivalents at beginning of year 1,767 405

Cash and cash equivalents at end of year 10 1,821 1,767

The accompanying notes are an integral part of the financial statements.

page 50 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Notes to the Financial Statements

for the year ended 31 March 2022

1 Accounting Policies

A summary of the principal accounting policies is set out below.

BASIS OF ACCOUNTING

The financial statements of the Company have been prepared in accordance with International Accounting Standards in

conformity with the Companies Act 2006. The annual financial statements have been prepared in accordance with the Statement

of Recommended Practice issued by the Association of Investment Companies (“AIC SORP”) for the financial statements of

investment trust and venture capital trusts, except to any extent where it is not consistent with the requirements of International

Accounting Standards in conformity with the Companies Act 2006.

The functional and presentational currency of the Company is Pounds Sterling and has been determined on the basis of the

currency of the Company’s share capital and the currency in which dividends and expenses are paid.

The financial statements have been prepared on a going concern basis, under historical cost convention, except for the

measurement at fair value of investments measured at fair value through profit or loss and on the expectation that approval as an

investment trust company will continue to be met.

The financial statements have adopted the following accounting policies in their preparation, which remain consistent with the

accounting policies adopted in the audited financial statements for the year ended 31 March 2021. All values are rounded to the

nearest thousand pounds unless otherwise indicated.

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, for the period to 30 June 2023, which is at least

twelve months from the date of approval of these accounts. As part of this review, the Directors have reviewed a forecast for

the period to 30 June 2023. The Directors noted that the Company holds a portfolio of highly liquid listed investments. The

Company is a closed end fund, where assets are not required to be liquidated to meet redemptions. Whilst the economic impact

from the pandemic is uncertain, the Directors believe it is possible that the Company could continue to experience reductions in

income and/or market value, and that this should not be to a level which would threaten the Company’s ability to continue as a

going concern. The Directors, the Manager and other service providers have had contingency plans operating for over a year to

minimise disruption and these measures remain in place. Furthermore, the Directors are not aware of any material uncertainties

that may cast doubt upon the Company’s ability to continue as a going concern. Therefore, the financial statements have been

prepared on a going concern basis. Further detail is included in the Directors’ Report on pages 26 and 27. In addition to the Going

Concern assessment the Directors have assessed the longer term viability of the Company as set out in the viability assessment

and statement on page 18.

ACCOUNTING DEVELOPMENTS

In the current year, the Company has applied the following standard, but has not had a significant effect on the Company:

IFRS 9 "Financial Instruments" interest benchmark reform phase 2.

Certain new accounting standards, amendments to accounting standards and interpretations have been published that are

not mandatory for 31 March 2022 reporting periods and have not been early adopted by the Company. These standards,

amendments or interpretations are not expected to have a material impact on the entity in the current or future reporting periods

and on foreseeable future transactions.

CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY.

The preparation of financial statements in conformity with International Accounting Standards in conformity with the Companies

Act 2006, requires management to make judgements, estimates and assumptions that affect the application of policies and the

reported amounts in the Balance Sheet, the Income Statement and the disclosure of contingent assets and liabilities at the date

of the financial statements. The estimates and associated assumptions are based on historical experience and various other

factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements

about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from

these estimates.

The areas requiring the most significant judgement and estimation in the preparation of the financial statements are: recognising

and classifying unusual or special dividends received as either revenue or capital in nature; and setting the levels of dividends paid

and proposed in satisfaction of both the Company’s long-term objective and its obligations to adhere to investment trust status

rules under Section 1158 of the Corporation Tax Act 2010.

Dividends received which appear to be unusual in size or circumstance are assessed on a case-by-case basis, based on

interpretation of the investee companies’ relevant statements, to determine their allocation in accordance with the SORP to either

the revenue account or capital reserves. Dividends which have clearly arisen out of the investee company’s reconstruction or

reorganisation are usually considered to be capital in nature and allocated to capital reserves. Investee company dividends which

appear to be paid in excess of current year profits will still be considered as revenue in nature unless evidence suggests otherwise.

The estimates and underlying assumptions are reviewed on an ongoing basis. Any revisions to accounting estimates are recognised

in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future period

if the revision affects both current and future periods. There are significant judgements or estimates in these financial statements.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 51

1 Accounting Policies continued

SEGMENTAL REPORTING

The Board is of the view that the Company is engaged in a single segment of business, of investing in European quoted smaller

companies, and that therefore the Company has only a single operating segment.

PRESENTATION OF STATEMENT OF COMPREHENSIVE INCOME

In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC,

supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital

nature has been presented alongside the Statement of Comprehensive Income. The net revenue return is the measure the

Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Section 1158 of the

Corporation Tax Act 2010.

INCOME

Dividends are recognised as income on the date that the related investments are marked ex-dividend.

Dividends receivable on equity shares where no ex-dividend date is quoted are recognised when the Company’s right to receive

payment is established.

Special dividends are taken to the 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.

Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash

dividend foregone is recognised as income.

All other income is accounted for on a time apportioned basis.

EXPENSES AND FINANCE COSTS

All expenses and finance costs are accounted for on an accruals basis and are charged against revenue, except where incurred

in connection with the maintenance or enhancement of the value of the Company’s assets and taking account of the expected

long-term returns as follows:

− finance costs payable are allocated 35% to revenue and 65% to capital.

− management expenses payable are allocated 35% to revenue and 65% to capital.

TAXATION

The tax expense represents the sum of the tax currently payable and movements in deferred tax. Tax payable is based on the

taxable profit for the year and withholding tax payable. Taxable profit differs from profit before tax as reported in the Statement of

Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further

excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have

been enacted or substantively enacted by the balance sheet date.

In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented against

capital returns in the supplementary information in the Statement of Comprehensive Income is the ‘marginal basis’. Under this

basis, if taxable income is capable of being offset entirely by expenses presented in the revenue return column of the Statement of

Comprehensive Income, then no tax relief is transferred to the capital return column.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities

in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using

the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax

assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary

differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer

probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is

realised. Deferred tax is charged or credited in the Statement of Comprehensive Income, except when it relates to items charged

or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Investment trusts which have approval under Section 1158 of the Corporation Tax Act 2010 are not liable to taxation on capital gains.

page 52 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

1 Accounting Policies continued

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

the documented investment strategy and information is provided internally on that basis to the Company’s Board of Directors and

other key management personnel.

The investments held by the Company are designated by the Company as ‘at fair value through profit or loss’.

All gains and losses are allocated to the capital return within the Statement of Comprehensive Income as ‘Gains or losses on

investments held at fair value through profit or loss’. Also included within this heading are transaction costs in relation to the

purchase or sale of investments. When a sale or purchase is made under a contract, the terms of which require delivery within the

timeframe of the relevant market, the investments concerned are recognised or derecognised on the trade date.

All investments are classified upon initial recognition as held at fair value through profit or loss, and are measured at subsequent

reporting dates at fair value, which is the bid price or the last traded price depending on the convention of the exchange on which

the investment is listed. The Company derecognises a financial asset only 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 a fair value is measured or disclosed in the financial statements are categorised within the fair value

hierarchy levels set out in note 15.

CASH AND CASH EQUIVALENTS

Cash comprises bank balances and cash held by the Company. Cash equivalents are short-term, highly liquid investments that

are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

LOANS

The loans are valued at amortised cost. Costs in relation to arranging the debt finance have been capitalised and are amortised

over the term of the finance. Hence, amortised cost is the par value less the amortised cost of issue.

The Euro loan is shown at amortised cost with the exchange difference on the principal amounts to be repaid reflected. Any gains

or losses arising from changes in exchange rate between Euro and Sterling is included in the capital reserves and shown in the

capital column of the Statement of Comprehensive Income.

RESERVES

Share Premium Account

The following are included in this reserve:

• premium on the issue of shares.

• surplus arising on the sale of Ordinary Shares from treasury.

• costs associated with the issue of equity.

Capital Redemption Reserve

The nominal value of Ordinary Shares bought back for cancellation is added to this reserve. This reserve is non-distributable.

Capital Reserve

The following are included in this reserve:

• gains and losses on the realisation of investments.

• increases and decreases in the valuation of investments held at the year end.

• exchange differences of a capital nature.

• special dividends of a capital nature.

• expenses and finance costs, together with the related taxation effect, charged in accordance with the above policies.

• cost of purchasing Ordinary Shares to be held in treasury or cancelled.

• proceeds from the issue of Ordinary Shares held in treasury equivalent to the weighted average cost of the repurchase.

Notes to the Financial Statements continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 53

1 Accounting Policies continued

In addition, the Company’s Articles of Association permit it to distribute from the Capital Reserve any surplus arising from the

realisation of its investments.

Revenue Reserve

The net profit arising in the revenue column of the Statement of Comprehensive Income is added to this reserve. Dividends paid

during the year may be deducted from this reserve.

FINANCIAL INSTRUMENTS

Financial assets and financial liabilities are recognised on the Balance Sheet of the Company when the Company becomes a party

to the contractual provisions of the instrument. The Company shall offset financial assets and financial liabilities if it has a legally

enforceable right to set off the recognised amounts and intends to settle on a net basis. As at 31 March 2022, no financial assets

or financial liabilities had been offset (31 March 2021: nil).

FOREIGN CURRENCIES

Monetary assets and liabilities expressed in foreign currencies are translated into sterling at rates of exchange ruling at the balance

sheet date. Non-monetary items expressed in foreign currencies held at fair value are translated into sterling at rates of exchange

ruling at the date the fair value is measured. Transactions in foreign currencies are converted to sterling at the rate ruling at the

date of the transaction. Exchange gains and losses are taken to the Statement of Comprehensive Income as a capital or revenue

item depending on the nature of the underlying item.

Exchange gains and losses on investments are included within ‘Gains/(losses) on investments held at fair value’ and are taken to

the Capital Reserve. Exchange differences on other financial instruments are included in the Statement of Comprehensive Income

as ‘Exchange losses’.

Rates of exchange (per Pound Sterling)

31 March

2022

31 March

2021

Change

Danish Krone

8.80

8.56 2.8

Euro

1.18

1.15 2.6

Norwegian Krone

11.52

12.04 (4.3)

Swedish Krona

12.27

11.74 4.5

Swiss Franc

1.21

1.26 (4.0)

2 Income

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Investment income

Overseas dividend income

3,785

2,175

Exchange gains/(losses)

(10)

Other income

–

Total

3,788

2,166

3 Management Expenses

Year to 31 March 2022

Year to 31 March 2021

Revenue

£’000

Capital

£’000

Total

£’000

Revenue

£’000

Capital

£’000

Total

£’000

Investment management fee

1,074 1,996 3,070

748 1,390 2,138

AIFM fee

18 32 50

1,092 2,028 3,120

766 1,422 2,188

Details of the management fee arrangements during the year are contained within the Directors’ Report on page 25 and details of

fees owed to the Manager at the balance sheet date are included in note 11.

page 54 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

4 Other Expenses

Year to 31 March 2022

Year to 31 March 2021

Revenue

£’000

Capital

£’000

Total

£’000

Revenue

£’000

Capital

£’000

Total

£’000

Directors’ fees

93 – 93

97 – 97

Auditor’s remuneration for:

– statutory audit

45 – 45

38 – 38

Secretarial and administration fees

150 – 150

144 – 144

Legal, professional and advisory fees

9 – 9

48 – 48

Custody and depositary fees

118 – 118

83 – 83

Credit facility commitment fee

56 – 56

59 – 59

Share split costs

– 38 38

– – –

Other

99 – 99

177 – 177

570 38 608

646 – 646

Auditor's remuneration paid excludes VAT.

5 Finance Costs

Year to 31 March 2022

Year to 31 March 2021

Revenue

£’000

Capital

£’000

Total

£’000

Revenue

£’000

Capital

£’000

Total

£’000

Interest payable on bank borrowings

56 104 160

56 105 161

6 Taxation

Year to 31 March 2022

Year to 31 March 2021

Revenue

£’000

Capital

£’000

Total

£’000

Revenue

£’000

Capital

£’000

Total

£’000

Overseas tax

348 – 348

169 – 169

FACTORS AFFECTING TAX CHARGE FOR THE YEAR

The tax charge for the year is lower than the standard rate of corporation tax in the UK. The differences are explained below:

Year to

31 March 2022

£'000

Year to

31 March 2021

£'000

Profit on ordinary activities before taxation

18,442

107,804

Corporation tax at standard rate of 19% (2021: 19%)

3,504

20,483

Effects of:

Non-taxable gains on investments

(3,573)

(20,661)

Movement in unutilised expenses

739

569

Non-taxable overseas income

(720)

(412)

Exchange losses 50 21

Overseas tax 348 169

Total tax charge for the year 348

169

As at 31 March 2022, the Company had unutilised management expenses for taxation purposes of £29,847,000

(2021: £29,778,000). A deferred tax asset of £5,671,000 (2021: £5,658,000) has not been recognised on the unutilised expenses

as it is unlikely that there will be suitable taxable profits from which the future reversal of the deferred tax could be deducted.

Notes to the Financial Statements continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 55

7 Dividends

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Final dividend for the year ended 31 March 2020 of 0.725p per share*

–

1,213

Interim dividend for the year ended 31 March 2021 of 0.200p per share*

–

342

Final dividend for the year ended 31 March 2021 of 0.725p per share*

1,276

–

Interim dividend for the year ended 31 March 2022 of 0.200p per share

361

–

1,637

1,555

Amounts relating to the year but not paid at the year end:

Final dividend for the year ended 31 March 2021 of 0.725p per share*

–

1,261

Final dividend for the year ended 31 March 2022 of 0.725p per share

1,373

–

1,373

1,261

The Directors have proposed a final dividend in respect of the year ended 31 March 2022 of 0.725p per share, payable

on 16 September 2022 to all shareholders on the register on 12 August 2022. The final dividend is subject to approval by

shareholders at the Annual General Meeting.

The attributable revenue and the dividends paid and proposed for the purposes of the income retention test for section 1159 of the

Income and Corporation Tax Act 2010, are set out below:

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Revenue attributable to equity shareholders

1,718

529

Interim dividend for the year ended 31 March 2021 of 0.200p per share*

–

(342)

Proposed final dividend for the year ended 31 March 2021 of 0.725p per share*

–

(1,261)

Interim dividend for the year ended 31 March 2022 of 0.200p per share

(361)

–

Proposed final dividend for the year ended 31 March 2022 of 0.725p per share

–

Net movement in revenue

1,357

(1,074)

* Restated to reflect the subsequent 10 for 1 share split.

8 Return per Share

Year to 31 March 2022

Year to 31 March 2021

Revenue Capital Total

Basic

0.96p 9.09p 10.05p

0.31p 63.24p 63.55p

Basic total return per Ordinary Share is based on the total comprehensive gain for the financial year of £18,094,000 (2021:

£107,635,000) and on 180,046,654 (2021: 169,360,950*) Ordinary Shares, being the weighted average number of Ordinary

Shares in issue during the year, excluding those shares bought back and held in treasury.

Basic revenue return per Ordinary Share is based on the net revenue return on ordinary activities after taxation of £1,722,000

(2021: £529,000), and on 180,046,654 (2021: 169,360,950*) Ordinary Shares, being the weighted average number of Ordinary

Shares in issue during the year, excluding those shares bought back and held in treasury.

Basic capital return per Ordinary Share is based on the net capital return for the financial year of £16,372,000 (2021: £107,106,000),

and on 180,046,654 (2021: 169,360,950*) Ordinary Shares, being the weighted average number of Ordinary Shares in issue during

the year, excluding those shares bought back and held in treasury.

* Restated to reflect the subsequent 10 for 1 share split.

page 56 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

9 Investments held at Fair Value Through Profit and Loss

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Opening cost

145,479

121,712

Holding gains

137,096

47,306

Opening fair value

282,575

169,018

Purchases at cost

75,867

57,443

Sales – proceeds

(37,460)

(52,628)

– gains on sales

12,451

18,952

Holding gains

6,355

89,790

Closing fair value

339,788

282,575

Closing cost

196,337

145,479

Holding gains

143,451

137,096

Closing valuation

339,788

282,575

Net gains on the realisation of investments during the year represents the difference between the net proceeds of sale and the

book cost of investment sold.

Movement in fair value represents the decrease in the difference between book cost of investments held and their market value at

31 March 2022 compared with the difference between the book cost of investments held and their market value at 31 March 2021.

TRANSACTION COSTS

The Company incurred transaction costs on the purchase of investments of £66,000 and sale of investments of £25,000 (2021:

£46,000 on purchases and £34,000 on sales).

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Gains on sales

12,451

18,952

Increase in holding gains

6,355

89,790

Gains on investments

18,806

108,742

10 Current Assets

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Due from brokers

109

121

Prepayments and accrued income

235

221

Overseas tax recoverable

623

440

967

782

The carrying value of the balances above approximates to fair value. There are no amounts which are past due at the year end

(2021: £nil).

CASH AND CASH EQUIVALENTS

These comprise bank balances and cash held by the Company. The carrying amount of these assets approximates to their fair value.

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Cash at bank and on hand

1,821

1,767

Notes to the Financial Statements continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 57

11 Current Liabilities

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Trade and other payables:

Investment management and AIFM fee

471

432

Due to broker

187

–

Other creditors

129

132

787

564

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Revolving credit facility:

Revolving credit facility

8,450

–

The Company has a €15 million five year secured revolving credit facility with ING which will mature on 13 September 2023.

Drawdowns from the facility are charged at margin over the relevant EUROBOR rate. As at 31 March 2022, €10 million

(£8,450,000) of the facility was drawn (2021: €nil (£nil)), at a rate of 1.2%, with €5 million available to be drawn

(31 March 2021: €15 million).

Once drawn, the facility will be measured at amortised cost and revalued for exchange rate movements. Any gain or loss

arising from changes in exchange rates is included in the capital reserve and shown in the capital column of the Statement of

Comprehensive Income. Interest costs are charged to capital and revenue in accordance with the Company’s accounting policies.

The carrying value of the balances above approximates to fair value.

12 Interest-Bearing Bank Loans

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Opening balance

8,495

8,809

Amortisation of set-up costs

Non-cash foreign currency movements

(71)

(325)

Closing balance

8,434

8,495

The Company has a €10 million five year secured loan with ING Bank N.V. at a fixed rate of 1.33% per annum. This loan will

mature on 13 September 2023.

The Company also has a €15 million five year secured revolving credit facility with ING which will also mature on

23 September 2023.

Under the bank covenants relating to the loans, the Company is to ensure that at all times the total borrowings of the Company do

not exceed 40% of the Adjusted Net Asset Value (as defined in the loan agreements) and that the Adjusted Net Asset Value does

not fall below £45 million (2021: £45 million). The Company met all covenant conditions during the year.

The carrying value of the balances above approximates to fair value.

page 58 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

13 Called-up Share Capital

Listed Held in Treasury In Issue

Number £’000 Number £’000 Number £’000

Allotted, issued and fully paid:

Ordinary Shares of 5p (2021: 50p) each

Balance at 1 April 2021 17,448,260 8,724 (75,000) (38) 17,373,260 8,686

Shares issued from treasury* – – 75,000 38 75,000 38

Shares issued prior to the share split* 520,000 260 – – 520,000 260

Shares issued after the share split 9,745,000 487 – – 9,745,000 487

Shares issued through share split 161,714,340 – – – 161,714,340 –

Balance at 31 March 2022 189,427,600 9,471 – – 189,427,600 9,471

* Balances stated prior to the subsequent 10 for 1 share split.

At the Annual General Meeting of the Company held on 9 September 2021, shareholders approved a resolution for a ten for one

share split such that each shareholder would receive ten shares with a nominal value of 5 pence each for every one share held.

These new shares were listed on 14 September 2021. Expenses associated with the share split amount to £38,000.

CAPITAL MANAGEMENT

The Company’s capital is represented by the issued Share Capital, Share Premium Account, Capital Redemption Reserve,

Capital Reserve, Revenue Reserve and external debt financing. Details of the movement through each reserve are shown in the

Statement of Changes in Equity. The Company is not subject to any externally imposed capital requirements other than those

associated with the loan finance.

The Company’s capital is managed in accordance with its investment policy, in pursuit of its investment objective, both of which

are detailed in the Business Model and Strategy. The Company’s capital structure is also explained in the Directors’ Report on

pages 25 and 26.

14 Net Asset Value per Ordinary Share

Net asset value per share

As at 31 March

Net asset value

As at 31 March

2022

2021

2022

£'000

2021

£'000

Net asset value per Ordinary Share

171.5

158.9*

324,905

276,065

The net asset value per share is based on net assets at the year end and on 18 9,4 27,6 0 0 (2021: 173,732,600*) Ordinary Shares,

being the number of Ordinary Shares in issue at the year end, excluding those shares bought back and held in treasury.

* Restated to reflect the subsequent 10 for 1 share split.

15 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 Company’s principal risks are described in the Business Model and Strategy on pages 15 to 17.

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.

Notes to the Financial Statements continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 59

15 Financial Instruments continued

FAIR VALUE HIERARCHY

The Company measures fair values using the following fair value 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 assets as follows:

• Level 1 – valued using quoted prices unadjusted in active markets for identical assets or liabilities.

• Level 2 – valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted

prices included within 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.

The tables below set out fair value measurements of financial instruments as at the year end, by the level in the fair value hierarchy

into which the fair value measurement is categorised.

The Company held the following categories of financial instruments all of which are included fair value or amortised cost with is an

approximation of fair value as at 31 March 2022:

Level 1

£’000

Level 2

£’000

Level 3

£’000

2022

Total

£’000

Level 1

£’000

Level 2

£’000

Level 3

£’000

2021

Total

£’000

Financial instruments

Investments

339,788 – – 339,788

282,575 – – 282,575

Interest-bearing bank loan

– (8,434) – (8,434)

– (8,495) – (8,495)

Revolving credit facility

– (8,450) – (8,450)

– – – –

There were no transfers between levels in the fair value hierarchy in the year ended 31 March 2022 (2021: none).

Cash balances of £1,821,000 (2021: £1,767,000), debtors of £344,000 (2021: £342,000) and creditors of £787,000

(2021: £564,000) are considered financial instruments.

16 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 £339,788,000 (2021: £282,575,000).

If the investment portfolio valuation fell by 10% from the amount detailed in the financial statements as at 31 March

2022, it would have the effect, with all other variables held constant, of reducing the net capital return before taxation by

£33,979,000 (2021: £28,257,000). An increase of 10% 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.

page 60 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

17 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 £8.5 million as

at 31 March 2022, 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

The Company has a €10 million fully drawn revolving credit facility term with ING Bank N.V., with a Sterling equivalent of

£8.5 million as at 31 March 2022, at a rate of interest of 1.20% per annum.

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 2022, the cash position of the Company was £1.8 million (2021: £1.8 million).

If interest rates had increased by 1.0%, the impact on the profit or loss and the net asset value would have been negative £67,000

(2021: positive £18,000). If interest rates had decreased by 1.0%, the impact on the profit or loss and the net asset value would

have been positive £67,000 (2021: negative £18,000). The calculations are based on the floating rate balances as at the respective

balance sheet dates.

18 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.

Foreign currency exposure:

As at 31 March 2022

Investments

£’000

Trade

and other

receivables

£’000

Cash

£’000

Trade

and other

payables

£’000

Revolving

credit

facility*

£’000

Interest-

bearing

bank loan*

£’000

Net

exposure

£’000

Danish Krone

16,452 115 – – – – 16,567

Euro

161,658 339 1,462 (186) (8,450) (8,434) 146,389

Norwegian Krone

23,183 60 – – – – 23,243

Swedish Krona

104,584 34 – – – – 104,618

Swiss Franc

33,911 318 – – – – 34,229

Total

339,788 866 1,462 (186) (8,450) (8,434) 325,046

As at 31 March 2021

Investments

£’000

Trade

and other

receivables

£’000

Cash

£’000

Trade

and other

payables

£’000

Revolving

credit

facility*

£’000

Interest-

bearing

bank loan*

£’000

Net

exposure

£’000

Danish Krone 12,182 104 – – – – 12,286

Euro 133,542 148 1,474 – – (8,495) 126,669

Norwegian Krone 20,690 50 – – – – 20,740

Swedish Krona 88,058 121 – – – – 88,179

Swiss Franc 28,103 138 – – – – 28,241

Total 282,575 561 1,474 – – (8,495) 276,115

* Par value excluding amortised Costs

If the value of Sterling had weakened by 5% (2021: 5%) against each of the currencies in the portfolio, the impact on the profit

or loss and the net asset value would have been positive £17,108,000 (2021: positive £14,230,000). If the value of Sterling had

strengthened by 5% (2021: 5%) against each of the currencies in the portfolio, the impact on the profit or loss and the net asset

value would have been negative £15,478,000 (2021: negative £13,806,000). These calculations are based on the foreign currency

exposure balances as at the respective balance sheet dates.

Notes to the Financial Statements continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 61

19 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.

The Company had the following categories of financial assets exposed to credit risk as at 31 March 2022:

Year to

31 March 2022

£’000

Year to

31 March 2021

£’000

Cash and cash equivalents

1,821

1,767

Due from brokers and accrued income

243

317

2,064

2,084

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions

is considered to be small due to the short settlement period involved and the financial stability and credit quality of the brokers

used, which are monitored on an ongoing basis by the Manager. The Manager also monitors the quality of service provided by the

brokers used to further mitigate this risk.

There were no significant concentrations of credit risk to counterparties at 31 March 2022 or 31 March 2021. No individual

investment exceeded 5.8% of the investment portfolio at 31 March 2022 (2021: 4.5%).

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 SA/NV (London Branch), 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.

20 Liquidity Risk

The Company does not hold unlisted securities (2021: £nil). The Company’s listed securities are considered to be readily realisable.

However, as with all smaller company investment trusts, there are times when the liquidity of the underlying portfolio is poor, such

as when smaller companies are out of favour or during periods of adverse economic conditions. The Manager focuses on smaller

companies where the opportunities may be more attractive but this can decrease overall underlying liquidity. This may result in

the Manager being unable to buy or sell individual holdings within the portfolio. The Manager constantly reviews the underlying

liquidity of the portfolio and deals with a wide range of brokers to enhance its ability to execute transactions and minimise liquidity

risk. The Company’s overall exposure to liquidity risks is monitored on a regular basis by the Board.

Liquidity risk is mitigated as the Company maintains sufficient cash to pay accounts payable and accrued expenses. As at

31 March 2022, the cash position of the Company was £1.8 million (2021: £1.8 million) and the Company has undrawn bank

facilities of £4.2 million (2021: £12.8 million).

page 62 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

20 Liquidity Risk continued

CONTRACTUAL MATURITY ANALYSIS FOR FINANCIAL LIABILITIES

As at 31 March 2022

Within

one month

£’000

Between

one and

three months

£’000

Between

three and

twelve months

£’000

Between one

and five years

£’000

Total

£’000

Liabilities:

Other creditors

700 76 11 – 787

Revolving credit facility

8,450 – – – 8,450

Loan and loan interest

– – 114 8,507 8,621

Total liabilities 9,150 76 125 8,507 17,858

As at 31 March 2021

Within

one month

£’000

Between

one and

three months

£’000

Between

three and

twelve months

£’000

Between one

and five years

£’000

Total

£’000

Liabilities:

Other creditors 461 101 2 – 564

Revolving credit facility – – – – –

Loan and loan interest – – 121 8,520 8,641

Total liabilities

461 101 123 8,520 9,205

21 Related Parties and Transactions with the Manager

The following are considered related parties: the Board of Directors. The Directors of the Company received fees for their services

and dividends from their shareholdings in the Company. Further details are provided in the Directors’ Remuneration Report on

pages 35 to 37.

Transactions between the Company and the Manager are detailed in note 3 on management fees and note 11 on fees owed to the

Manager at the balance sheet date. The existence of an independent Board of Directors demonstrates that the Company is free to

pursue its own financial and operating policies and therefore, under the AIC SORP, the Manager is not considered to be a related party.

22 Securities financing transactions (“SFT”)

The Company has not, in the year to 31 March 2022 (2021: same), participated in any: repurchase transactions; securities lending

or borrowing; buy-sell back transactions; margin lending transactions; or total return swap transactions (collectively called SFT).

As such, it has no disclosure to make in satisfaction of the EU regulations on transparency of SFT, issued in November 2015.

23 Post Balance Sheet Events

Subsequent to the year end, investment valuations have fallen as a result of the market reaction to sustained inflationary forces,

rising bond yields and Central Bank tightening. As at 20 June 2022 (being the latest practicable date before publication of this

report), this had resulted in a decrease in net asset value of 18.9% to 139.1p and the Company's share price closing 28 .1% lower

at 120.8p compared to the balance sheet date.

These movements relate to post year end activity and will be reported in the Company's Annual Report and Accounts for the year

ended 31 March 2023.

Notes to the Financial Statements continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 63

AIFMD Disclosures (Unaudited)

Alternative Investment Fund Managers (‘AIFM’) Directive (‘AIFMD’)

In accordance with the AIFMD, information in relation to the Company’s leverage (as defined on page 69) and the remuneration

of the Company’s AIFM, Montanaro Asset Management Limited, is required to be made available to investors. Detailed regulatory

disclosures including those on the AIFM’s remuneration policy are available on the Company’s website or from Montanaro Asset

Management Limited on request. The Company’s maximum and actual leverage levels at 31 March 2022 are shown below:

Leverage exposure

Gross

method

Commitment

method

Maximum limit 200% 200%

Actual 104.58% 105.14%

For the purposes of the AIFMD, leverage is any method which increases the Company’s exposure, including the borrowing of cash

and the use of derivatives. It is expressed as a percentage of Company’s exposure to its net asset value and is calculated on both

a gross and commitment method.

Under the gross method, exposure represents the sum of the Company’s positions after deduction of cash and cash equivalents,

without taking account of any hedging or netting arrangements. Under the commitment method, exposure is calculated without

the deduction of cash and cash equivalents and after certain hedging and netting positions are offset against each other.

The leverage limits are set by the AIFM and approved by the Board. The AIFM is also required to comply with the gearing

parameters set by the Board in relation to borrowings. Detailed regulatory disclosures to investors in accordance with the AIFMD

are contained on the AIFM’s website.

page 64 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Shareholder Information

Annual General Meeting

The Annual General Meeting of Montanaro European Smaller Companies Trust plc will be held on Thursday 8 September 2022 at

11.0 0 a.m. at 53 Threadneedle Street, London EC2R 8AR. Further details can be found on pages 70 to 77.

Key Dates

31 March 2022 Company year end

8 September 2022 Annual General Meeting

16 September 2022 Payment of final dividend

November 2022 Interim results announced

January 2023 Payment of expected interim dividend

Dividends

Shareholders who wish to have dividends paid directly into a bank account rather than by cheque to their registered address can

complete a Mandate Form for this purpose. Mandates can be obtained from Equiniti Limited on request at the address shown on

page 78.

Change of Address

Communications with shareholders are mailed to the address shown on the share register. In the event of a change of address or

other amendment this should be notified to Equiniti Limited under the signature of the registered holder.

Frequency of NAV Publication

The Company’s NAV is released to the London Stock Exchange on a daily basis.

Non-Mainstream Pooled Investment (“NMPI”) Status

The Company currently conducts its affairs so that the shares it issues can be recommended by financial advisers to retail

investors in accordance with the FCA’s rules in relation to non-mainstream investment products. It is intended to continue to do

so for the foreseeable future. The Company’s securities are excluded from the FCA’s restrictions which apply to non-mainstream

investment products because they are securities in a UK listed investment trust.

ISA Status

The Company’s shares are fully eligible for inclusion in ISAs.

AIC

The Company is a member of the Association of Investment Companies (‘AIC’).

Data protection

The Company is committed to protecting and respecting the confidentiality, integrity and security of the personal data it holds. For

information on the processing of personal data, please see the privacy policy on the website at www.montanaro.co.uk.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 65

Warning to Shareholders – Beware of Share Fraud

Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that turn out to be

worthless or non-existent, or to buy shares at an inflated price in return for an upfront payment.

If you receive unsolicited investment advice or requests:

• Check the Financial Services Register at www.fca.org.uk to see if the person or firm contacting you is authorised by the

Financial Conduct Authority (‘FCA’).

• Call the FCA on 0800 111 6768 if the firm does not have contact details on the Register or you are told they are out of date.

• Search the list of unauthorised firms to avoid at www.fca.org.uk/scams.

• Consider that if you buy or sell shares from an unauthorised firm you will not have access to the Financial Ombudsman

Service or Financial Services Compensation Scheme.

• Think about getting independent financial and professional advice.

If you are approached by fraudsters please tell the FCA by using the share fraud reporting form at www.fca.org.uk/scams where

you can find out more about investment scams. You call also call the FCA Consumer Helpline on 0800 111 6768.

If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040.

page 66 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Alternative Performance Measures (“APMs”)

The Company uses the following APMs:

Premium/(discount)

If the share price of an Investment Trust is less than its Net

Asset Value per share, the shares are trading at a discount. If

the share price is greater than the Net Asset Value per share,

the shares are trading at a premium.

As at 31 March 2022, the Net Asset Value per share was 171.5p

(2021: 158.9p*) and the share price was 168.0p (2021: 161.0p*).

The discount is therefore calculated at 2.0% (2021: premium 1.3%)

as shown in the highlights on page 1.

Net Gearing Employed

Unlike open-ended investment companies, Investment Trusts

have the ability to borrow to invest. This term is used to

describe the level of borrowings that an Investment Trust has

undertaken, and is stated as a percentage of shareholders’

funds. The higher the level of borrowings, the higher the

gearing ratio.

Net gearing is calculated as total debt, net of cash and cash

equivalents, as a percentage of the total shareholders’ funds.

As at 31 March 2022, interest bearing bank loans and revolving

credit facility were £16,884,000, (2021: (£8,495,000)) cash

and cash equivalents were £1,821,000 (2021: £1,767,000)

and net assets were £324,905,000 (2021: £276,065,000). As

at 31 March 2022, Gearing is therefore equal to 4.6% (2021:

2.4%) as shown in the highlights on page 1.

Ongoing Charges (expressed as a percentage)

All operating costs expected to be incurred in future and that

are payable by the Company expressed as a proportion of the

average Net Assets of the Company over the reporting year.

The costs of buying and selling investments are excluded, as

are interest costs, taxation, non-recurring costs and the costs

of buying back or issuing Ordinary Shares.

Ongoing charges calculation

31 March 2022

£’000

31 March 2021

£’000

Total expenditure

3,728

2,834

Less non-recurring costs

(38)

–

Total (a)

3,690

2,834

Average monthly net assets (b)

338,926

240,757

Ongoing charges (c = a/b) (c)

1.1%

1.2%

Capital Return – NAV and Share Price Returns

Capital returns measure the effect of any rise or fall in the share

price or NAV, excluding any dividends paid. As at 31 March

2022, the 1 year NAV Capital Return was 7.9 % (2021: 66.1%),

and the 1 year Ordinary share price Capital Return was 4.3%

(2021: 83.0%), as shown in the highlights on page 1.

NAV Capital Return calculation as at 31 March 2022

NAV per share as at 31 March 2022 171.50p (a)

NAV per share as at 31 March 2021* 158.90p (b)

NAV Capital Return 7.9% ((a-b)/b)

NAV Capital Return calculation as at 31 March 2021

NAV per share as at 31 March 2021* 158.90p (a)

NAV per share as at 31 March 2020* 95.69p (b)

NAV Capital Return 66.1% ((a-b)/b)

Share Price Capital Return calculation as at 31 March 2022

Share Price as at 31 March 2022 168.00p (a)

Share Price as at 31 March 2021* 161.00p (b)

Share Price Capital Return 4.3% ((a-b)/b)

Share Price Capital Return calculation as at 31 March 2021

Share Price as at 31 March 2021* 161.00p (a)

Share Price as at 31 March 2020* 88.00p (b)

Share Price Capital Return 83.0% ((a-b)/b)

Total Return – NAV and Share Price Returns

Total returns measure the effect of any rise or fall in the share

price or NAV, plus dividends paid which are reinvested at the

prevailing NAV or share price on the ex-dividend date. As at

31 March 2022, the 1 year NAV Total Return was 8.4% (2021:

67.2%), and the 1 year Ordinary share price Total Return was

4.8% (2021: 84.2%), as shown in the highlights on page 1.

* Restated to reflect the subsequent 10 for 1 share split.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 67

NAV Total Return calculation as at 31 March 2022

NAV per share as at 31 March 2022 171.50p (c)

NAV per share as at 31 March 2021* 158.90p (d)

Dividend adjustment factor (+1) 1.0047 (a)

Pre-Dividend Reinvestment Factor 1.0793 (b)(b=c/d)

NAV Total Return 8.4 ((a*b)-1)

(a) Dividend Adjustment Factor

Dividend PPS*

Dividend XD

date

NAV at

Dividend XD

date*

NAV

Multiplier

Interim dividend 0.200 03 Dec 21 205.00p 0.0010

Final dividend 0.725 12 Aug 21 196.90p 0.0037

0.0047

NAV Total Return calculation as at 31 March 2021

NAV per share as at 31 March 2021* 158.90p (c)

NAV per share as at 31 March 2020* 95.69p (d)

Dividend adjustment factor (+1) 1.0067 (a)

Pre-Dividend Reinvestment Factor 1.6606 (b)(b=c/d)

NAV Total Return 67.2 ((a*b)-1)

(a) Dividend Adjustment Factor

Dividend PPS*

Dividend XD

date

NAV at

Dividend XD

date*

NAV

Multiplier

Interim dividend 0.200 03 Dec 20 154.00p 0.0013

Final dividend 0.725 13 Aug 20 135.00p 0.0054

0.0067

Share price Total Return calculation as at 31 March 2022

Share price as at 31 March 2022 168.00p (c)

Share price as at 31 March 2021* 161.00p (d)

Dividend adjustment factor (+1) 1.0046 (a)

Pre-Dividend Reinvestment Factor 1.0434 (b)(b=c/d)

Share price Total Return 4.8 ((a*b)-1)

(a) Dividend Adjustment Factor

Dividend PPS*

Dividend XD

date

Share price at

Dividend XD

date*

price

Multiplier

Interim dividend 0.200 03 Dec 21 208.50p 0.0010

Final dividend 0.725 12 Aug 21 201.00p 0.0036

0.0046

Share price Total Return calculation as at 31 March 2021

Share price as at 31 March 2021* 161.00p (c)

Share price as at 31 March 2020* 88.00p (d)

Dividend adjustment factor (+1) 1.0066 (a)

Pre-Dividend Reinvestment Factor 1.8294 (b)(b=c/d)

Share price Total Return 84.2 ((a*b)-1)

(a) Dividend Adjustment Factor

Dividend PPS*

Dividend XD

date

Share price at

Dividend XD

date*

price

Multiplier

Interim dividend 0.200 03 Dec 20 154.00p 0.0013

Final dividend 0.725 13 Aug 20 135.00p 0.0053

0.0066

* Restated to reflect the subsequent 10 for 1 share split.

page 68 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Glossary of Terms

AIFMD

Alternative Investment Fund Managers Directive. Issued by

the European Parliament in 2012 and 2013, the Directive

requires that all investment vehicles in the European Union,

including Investment Trusts, must, with effect from 22 July

2014, appoint a Depositary and an Alternative Investment

Fund Manager (AIFM). The Board of Directors of an Investment

Trust, nevertheless, remains fully responsible for all aspects

of the Company’s strategy, operations and compliance with

regulations.

Association of Investment Companies (‘AIC’)

The Association of Investment Companies is the trade body for

Closed-end Investment Companies (www.theaic.co.uk).

Benchmark

This is a measure against which an Investment Trust’s

performance is compared. The benchmark of the Company

is the MSCI Europe ex-UK SmallCap Index (capital return in

Sterling terms). The index averages the performance of a

defined selection of companies listed in European smaller

company stock markets and gives an indication of how those

markets have performed in any period.

Closed-end Investment Company

A company, including an Investment Trust, with a fixed issued

ordinary share capital which is traded on an exchange at a

price not necessarily related to the Net Asset Value of the

company and where shares can only be issued or bought

back by the company in certain circumstances. This contrasts

with an open-ended investment company, which has units

not traded on an exchange but issued or bought back from

investors at a price directly related to the Net Asset Value.

Custodian

A specialised financial institution responsible for safeguarding,

worldwide, the listed securities and certain cash assets of the

Company, as well as the income arising therefrom, through

provision of custodial, settlement and associated services. The

Company’s Custodian is The Bank of New York Mellon SA/NV

(London Branch).

Depositary

Under AIFMD rules applying from 22 July 2014, the Company

must appoint a Depositary, whose duties in respect of

investments, cash and similar assets include: safekeeping;

verification of ownership and valuation; and cash monitoring.

The Depositary has strict liability for loss of any investments or

other assets where it has safekeeping duties. The Depositary’s

oversight duties include, but are not limited to, oversight

of share buybacks, dividend payments and adherence to

investment limits. The Company’s Depositary is The Bank of

New York Mellon (International) Limited.

Dividend

The income from an investment. Some Investment Trusts pay

dividends on a quarterly or monthly basis. Montanaro European

Smaller Companies Trust plc currently pays dividends twice a

year.

Gearing

Gearing is calculated as total liabilities less current assets

divided by net assets.

Gross assets

Gross assets are calculated as total assets less current

liabilities.

International Accounting Standards

International Accounting Standards as adopted by the

European Union.

Investment Manager

The Company’s investment manager is Montanaro Asset

Management Limited. The responsibilities and remuneration of

the Manager are set out in the Business Model and Strategy on

page 12 and in the Directors’ Report on page 25.

Investment Trust

A Closed-end Investment Company which satisfies the

requirements of Section 1158 of the Corporation Tax Act 2010.

Companies which meet these criteria are exempt from having

to pay tax on the capital gains they realise from sales of the

investments within their portfolios.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 69

Leverage

As defined under the AIFMD rules, Leverage is any method by

which the exposure of an AIF is increased through borrowing of

cash or securities or leverage embedded in derivative positions.

Leverage is broadly equivalent to Gearing, but is expressed

as a ratio between the assets (excluding borrowings) and the

net assets (after taking account of borrowings). Under the

gross method, exposure represents the sum of the Company’s

positions after deduction of cash and cash equivalents, without

taking account of any hedging or netting arrangements. Under

the commitment method, exposure is calculated without the

deduction of cash and cash equivalents and after certain

hedging and netting positions are offset against each other.

Marked to Market

Accounting for the fair value of an asset or liability that can

change over time and reflects its current market value rather

than its book cost.

Market Capitalisation

The stock market value of a company as determined by

multiplying the number of shares in issue, excluding those

shares held in treasury, by the market price of the shares.

Net Assets (or Shareholders’ Funds)

This is calculated as the value of the investments and other

assets of an Investment Trust, plus cash and debtors, less

borrowings and any other creditors. It represents the underlying

value of an Investment Trust at a point in time.

Net Asset Value (‘NAV’) per Ordinary Share

This is calculated as the net assets of an Investment Trust

divided by the number of Ordinary Shares in issue, excluding

those shares held in treasury.

Ordinary Shares

The main type of equity capital issued by conventional

Investment Trusts. Shareholders are entitled to their share of

both income, in the form of dividends paid by the Investment

Trust, and any capital growth. Montanaro European Smaller

Companies Trust plc has only Ordinary Shares in issue.

Portfolio Turnover

Calculated using total sales proceeds as a percentage of the

average monthly net assets during the year.

Share Price

The value of a share at a point in time as quoted on a stock

exchange. The shares of Montanaro European Smaller

Companies Trust plc are quoted on the Main Market of the

London Stock Exchange.

SORP

Statement of Recommended Practice “Financial Statements of

Investment Trust Companies and Venture Capital Trusts” issued

by the AIC.

Total Assets

This is calculated as the value of the investments and other

assets of an Investment Trust, plus cash and debtors.

page 70 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt about any

aspect of the proposals referred to in this document or about the action which you should take, you should seek your own advice

immediately from a stockbroker, solicitor, accountant or other independent professional adviser. If you have sold or otherwise

transferred all of your shares, please pass this document, together with the accompanying documents, to the purchaser or

transferee, or to the person who arranged the sale or transfer, so they can pass these documents to the person who now holds

the shares.

Notice is hereby given that the Annual General Meeting of Montanaro European Smaller Companies Trust plc (the ‘Company’)

will be held at Montanaro Asset Management, 53 Threadneedle Street, London, EC2R 8AR, on Thursday 8 September 2022 at

11.0 0 a.m. for the purposes of considering and, if thought fit, passing the following resolutions, of which resolutions 1 to 9 will be

proposed as ordinary resolutions and resolutions 10 and 11 will be proposed as special resolutions.

ORDINARY RESOLUTIONS

RESOLUTION 1 – ANNUAL REPORT AND ACCOUNTS

That the Annual Report and Accounts of the Company for the year ended 31 March 2022 be received.

RESOLUTION 2 – ANNUAL REPORT ON DIRECTORS’ REMUNERATION

That the Annual Report on Directors’ Remuneration for the year ended 31 March 2022 be approved.

RESOLUTION 3 – FINAL DIVIDEND

That a final dividend of 0.725p per Ordinary Share be declared.

RESOLUTION 4 – RE-ELECTION OF DIRECTOR

That Mr R M Curling, who retires annually, be re-elected as a Director.

RESOLUTION 5 – RE-ELECTION OF DIRECTOR

That Ms C A Roxburgh, who retires annually, be re-elected as a Director.

RESOLUTION 6 – RE-ELECTION OF DIRECTOR

That Mr G Neilly, who retires annually, be re-elected as a Director.

RESOLUTION 7 – RE-APPOINTMENT OF AUDITOR

That PricewaterhouseCoopers LLP be re-appointed as the Company’s auditor, to hold office from the conclusion of this Meeting

until the conclusion of the next general meeting at which accounts are laid before the Company.

Notice of Annual General Meeting

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 71

RESOLUTION 8 – AUDITOR’S REMUNERATION

That the Directors be authorised to determine the auditor’s remuneration.

RESOLUTION 9 – AUTHORITY TO ALLOT SHARES

That, in substitution for any existing authority but without prejudice to the exercise of any such authority prior to the date of the

passing of this resolution, the Board of Directors of the Company (the ‘Board’) be and is hereby generally and unconditionally

authorised pursuant to and in accordance with section 551 of the Companies Act 2006 to exercise all the powers of the Company

to allot shares in the Company and to grant rights to subscribe for or to convert any security into shares in the Company up to an

aggregate nominal amount of £9 47,13 8, provided that this authority shall expire at the conclusion of the Annual General Meeting of

the Company to be held in 2023 or, if earlier, on 30 September 2023 save that the Company may before such expiry make an offer

or enter into an agreement which would or might require shares to be allotted, or rights to subscribe for or to convert securities

into shares to be granted, after such expiry and the Board may allot shares or grant such rights in pursuance of such an offer or

agreement as if the authority conferred hereby had not expired. The Directors will use this authority when it is in the best interests

of the Company to issue Ordinary shares for cash and will only issue new shares at a price representing a premium to the NAV per

share at the time of issuance.

SPECIAL RESOLUTIONS

RESOLUTION 10 – AUTHORITY TO ALLOT SHARES OTHER THAN ON A PRE-EMPTIVE BASIS

That, subject to the passing of resolution 9 and in substitution for any existing authority, but without prejudice to the exercise of

any such authority prior to the date of the passing of this resolution, the Board of Directors of the Company (the ‘Board’) be and

is hereby generally empowered pursuant to sections 570 and 573 of the Companies Act 2006 (the ‘Act’) to allot equity securities

(within the meaning of section 560 of the Act) (including the grant of rights to subscribe for, or to convert any securities into,

ordinary shares of 5 pence each in the capital of the Company (‘Ordinary Shares’)) wholly for cash either pursuant to the authority

conferred on them by such resolution 9 or by way of a sale of treasury shares (within the meaning of section 560(3) of the Act) as

if section 561(1) of the Act did not apply to any such allotment or sale, provided that this power shall be limited to the allotment of

equity securities and the sale of treasury shares:

(i) in connection with a rights issue, open offer or other pre-emptive offer in favour of the holders of Ordinary Shares who are on

the register of members on a date fixed by the Board where the equity securities respectively attributable to the interests of all

such holders are proportionate (as nearly as may be practicable) to the respective numbers of Ordinary Shares held by them on

that date (subject to such exclusions or other arrangements in connection with the rights issue, open offer or other offer as the Board

deem necessary or expedient to deal with shares held in treasury, fractional entitlements to equity securities and to deal with any legal

or practical problems or issues arising in any overseas territory or under the requirements of any regulatory body or stock exchange);

and

(ii) otherwise than pursuant to sub-paragraph (i) above, up to an aggregate nominal amount of £947,138, and shall expire (unless

previously renewed, varied or revoked by the Company in general meeting) at the conclusion of the Annual General Meeting of the

Company to be held in 2023 or, if earlier, on 30 September 2023 save that the Company may before such expiry make an offer or

agreement which would or might require equity securities to be allotted after such expiry and the Board may allot equity securities in

pursuance of such an offer or agreement as if the authority conferred hereby had not expired. This power shall authorise the

Board to issue equity securities at such issue price as the Board may determine (including, without limitation, where equity

securities are being issued from treasury at a price below the net asset value per Ordinary Share of the Company at the time of

the relevant issue).

page 72 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

RESOLUTION 11 – AUTHORITY TO BUY BACK SHARES

That, in substitution for any existing authority but without prejudice to the exercise of any such authority prior to the date of the

passing of this resolution, the Company be and is hereby generally and unconditionally authorised for the purposes of section 701

of the Companies Act 2006 (the ‘Act’) to make one or more market purchases (as defined in section 693(4) of the Act) of ordinary

shares of 5 pence each in the capital of the Company (‘Ordinary Shares’) on such terms and in such manner as the Board of

Directors may determine provided that:

(i) the maximum aggregate number of Ordinary Shares which may be purchased is 28,395,197 (or if less, 14.99 per cent of the

number of Ordinary Shares in issue (excluding treasury shares) immediately prior to the passing of this resolution);

(ii) the minimum price which may be paid for an Ordinary Share is 5 pence (exclusive of associated expenses);

(iii) the maximum price which may be paid for an Ordinary Share (exclusive of associated expenses) is the higher of:

(a) 105 per cent of the average of the market value of an Ordinary Share for the five business days immediately preceding the

day on which the Ordinary Share is purchased; and (b) the value of an Ordinary Share calculated on the basis of the higher

price quoted for:

(i) the last independent trade of; and

(ii) the highest current independent bid for any number of Ordinary Shares on the trading venue where the purchase is

carried out; and

(iv) unless previously renewed, varied or revoked, this authority shall expire at the conclusion of the Annual General Meeting of the

Company to be held in 2023 or, if earlier, on 30 September 2023 save that the Company may before such expiry enter into

a contract to purchase Ordinary Shares which will or may be completed wholly or partly after such expiry and a purchase of

Ordinary Shares may be made pursuant to any such contract.

By order of the Board

LINK COMPANY MATTERS LIMITED

Company Secretary

23 June 2022

Registered office:

16 Charlotte Square

Edinburgh EH2 4DF

Notice of Annual General Meeting continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 73

Explanation of Notice of Annual General Meeting

Resolution 1 – To receive the Annual Report and Financial Statements

The Directors are required to present the financial statements, Strategic Report, Directors’ Report and Auditor’s Report to the

meeting. These are contained in the Company’s Annual Report and Accounts for the year ended 31 March 2022 (the Annual

Report). A resolution to receive the financial statements, together with the Strategic Report, Directors’ Report and the Auditor’s

Report on those accounts is included as an ordinary resolution.

Resolution 2 – Remuneration

An advisory resolution to approve the Directors’ Remuneration Report (set out in the Annual Report) is included.

Resolution 3 – Final dividend

The Board proposes a final dividend of 0.725 pence per share in respect of the year ended 31 March 2022. If approved, the

recommended final dividend will be paid on 16 September 2022 to all ordinary shareholders who are on the register of members

on 12 August 2022. The shares will be marked ex-dividend on 11 August 2022.

Resolutions 4 to 6 – Re election of Directors

In line with the recommendations of the 2019 AIC Corporate Governance Code, all Directors of the Company are required to retire

and offer themselves for re-election at each AGM. In accordance with this requirement, Mr Curling, Ms Roxburgh and Mr Neilly will

retire and offer themselves for re-election as Directors.

All of the Directors seeking re-election are recommended by the Board for re-election. Full biographies of all of

the Directors are set out in the Annual Report on page 23 and are also available for viewing on the Company’s website

https://montanaro.co.uk/trust/montanaro-european-smaller-companies-trust/. The Nomination Committee considered the

Directors’ performance and recommended their re-election and the Board agrees that it is in the best interests of shareholders

that each of the Directors be re-elected.

Resolutions 7 and 8 – Re-Appointment and remuneration of Auditor

At each meeting at which the Company’s financial statements are presented to its members, the Company is required to appoint

an auditor to serve until the next such meeting. The Board, on the recommendation of the Audit Committee, recommends the

re-appointment of PricewaterhouseCoopers LLP as auditor to the Company. The auditor’s re-appointment will be proposed to the

AGM as Resolution 7. Resolution 8 authorises the Directors to fix the auditor’s remuneration.

Resolution 9 – Authority to allot ordinary shares

Resolution 9 authorises the Board to allot ordinary shares generally and unconditionally in accordance with Section 551 of the

Companies Act 2006 (the Act) up to an aggregate nominal value of £9 47,13 8 , representing approximately 10% of the issued

ordinary share capital at the date of the Notice, excluding shares held in treasury. This authority shall expire at the next AGM.

Resolution 10 – Authority to disapply pre emption rights

Resolution 10 is a special resolution which is being proposed to authorise the Directors to disapply the pre emption rights of

existing Shareholders in relation to issues of ordinary shares under Resolution 9 (being in respect of ordinary shares up to an

aggregate nominal value of £9 47,13 8 , representing approximately 10% of the Company’s issued ordinary share capital, including

treasury share, as at the date of the Notice). This authority shall expire at the next AGM.

The Directors will only allot new shares pursuant to the authorities proposed to be conferred by Resolutions 9 and 10 if they

believe it is advantageous to the Company’s shareholders to do so and in no circumstances would it result in an overall dilution of

the NAV per share. The Directors will only issue new shares at a price representing a premium to the NAV per share at the time of

issuance. The Board’s policy regarding the issue of shares from treasury is described on page 28.

page 74 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Resolution 11 – Purchase of own shares

Resolution 11 is a special resolution which will grant the Company authority to make market purchases of up to 28,395,197

ordinary shares, representing 14.99% of the ordinary shares in issue as at the date of the Notice. The ordinary shares bought back

will either be cancelled or placed into treasury, at the determination of the Directors. There are currently no shares held in treasury.

The maximum price which may be paid for each ordinary share must not be more than the higher of (i) 105% of the average of the

market value of an ordinary shares for the five business days immediately preceding the day on which the purchase is made or (ii)

the value of an Ordinary Share calculated on the basis of the higher price quoted for: (a) the last independent trade of; and (b) the

highest current independent bid for any number of Ordinary Shares on the trading venue where the purchase is carried out. The

minimum price which may be paid for each Ordinary share is £0.05.

This power will only be exercised if, in the opinion of the Directors, a purchase would result in an increase in the NAV per share

and be in the best interests of the shareholders as a whole. The Board’s intention is to apply an active discount management

policy, and to 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.

This authority shall expire at the next AGM, when a resolution to renew the authority will be proposed.

Notice of Annual General Meeting continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 75

Notes

1. Attending the Annual General Meeting in Person

If you wish to attend the Annual General Meeting in person, you should arrive at the venue for the Annual General Meeting in good

time to allow your attendance to be registered. It is advisable to have some form of identification with you as you may be asked to

provide evidence of your identity to the Company’s registrar, Equiniti Limited (the ‘Registrar’), prior to being admitted to the Annual

General Meeting.

2. Appointment of Proxies

Members are entitled to appoint one or more proxies to exercise all or any of their rights to attend, speak and vote at the Annual

General Meeting. A proxy need not be a member of the Company but must attend the Annual General Meeting to represent a

member. To be validly appointed a proxy must be appointed using the procedures set out in these notes and in the notes to the

accompanying proxy form.

If members wish their proxy to speak on their behalf at the meeting, members will need to appoint their own choice of proxy (not

the Chairman of the Annual General Meeting) and give their instructions directly to them.

Members can only appoint more than one proxy where each proxy is appointed to exercise rights attached to different shares.

Members cannot appoint more than one proxy to exercise the rights attached to the same share(s). If a member wishes to appoint

more than one proxy, they should contact the Registrar on 0371 384 2030. Lines are open from 8.30am to 5.30pm, Monday to

Friday excluding public holidays in England and Wales. If calling from overseas please call +44 371 384 2030. A member may

instruct their proxy to abstain from voting on any resolution to be considered at the meeting by marking the ‘Abstain’ option when

appointing their proxy. It should be noted that an abstention is not a vote in law and will not be counted in the calculation of the

proportion of votes ‘For’ or ‘Against’ the resolution.

The appointment of a proxy will not prevent a member from attending the Annual General Meeting and voting in person if he or

she wishes.

A person who is not a member of the Company but who has been nominated by a member to enjoy information rights does not

have a right to appoint any proxies under the procedures set out in these notes and should read note 8 below.

3. Appointment of a Proxy Using a Proxy Form

A proxy form for use in connection with the Annual General Meeting is enclosed. To be valid, any proxy form or other instrument

appointing a proxy, together with any power of attorney or other authority under which it is signed or a certified copy thereof, must

be received by post or (during normal business hours only) by hand by the Registrar at FREEPOST RTHJ-CLLL KBKU, Equiniti,

Aspect House, Spencer Road, Lancing BN99 6DA no later than 48 hours (excluding non-working days) before the time of the

Annual General Meeting or any adjournment of that meeting.

If you do not have a proxy form and believe that you should have one, or you require additional proxy forms, please contact the

Registrar on 0371 384 2030. Lines are open from 8.30am to 5.30pm, Monday to Friday excluding public holidays in England and

Wales. If calling from overseas please call +44 371 384 2030.

4. Appointment of a Proxy Through CREST

CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by

using the procedures described in the CREST Manual and by logging on to the following website: www.euroclear.com. CREST

personal members or other CREST sponsored members, and those CREST members who have appointed (a) voting service

provider(s), should refer to their CREST sponsor or voting service provider(s) who will be able to take the appropriate action on

their behalf.

In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a

‘CREST Proxy Instruction’) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications,

and must contain the information required for such instruction, as described in the CREST Manual. The message, regardless of

whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy,

must in order to be valid, be transmitted so as to be received by the Registrar (ID RA19) no later than 48 hours (excluding non-

working days) before the time of the Annual General Meeting or any adjournment of that meeting. For this purpose, the time of

receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Application Host) from

which the Registrar is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any

page 76 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

change of instructions to proxies appointed through CREST should be communicated to the appointee through other means.

CREST members and, where applicable, their CREST sponsors or voting service provider(s) should note that Euroclear UK &

Ireland Limited does not make available special procedures in CREST for any particular message. Normal system timings and

limitations will, therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member

concerned to take (or, if the CREST member is a CREST personal member, or sponsored member, or has appointed a voting

service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary

ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members

and, where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST

Manual concerning practical limitations of the CREST system and timings.

The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the

Uncertificated Securities Regulations 2001.

5. Appointment of Proxy by Joint Holders

In the case of joint holders, where more than one of the joint holders purports to appoint one or more proxies, only the purported

appointment submitted by the most senior holder will be accepted. Seniority is determined by the order in which the names of

joint holders appear in the Company’s register of members in respect of the joint holding (the first named being the most senior).

6. Corporate Representatives

Any corporation which is a member can appoint one or more corporate representatives. Members can only appoint more than

one corporate representative where each corporate representative is appointed to exercise rights attached to different shares.

Members cannot appoint more than one corporate representative to exercise the rights attached to the same share(s).

7. Entitlement to Attend and Vote

To be entitled to attend and vote at the Annual General Meeting (and for the purpose of determining the votes they may cast),

members must be registered in the Company’s register of members at 6.30pm on 6 September 2022 (or, if the Annual General

Meeting is adjourned, at 6.30pm on the day two days prior to the adjourned meeting). Changes to the register of members after

the relevant deadline will be disregarded in determining the rights of any person to attend and vote at the Annual General Meeting.

8. Nominated Persons

Any person to whom this notice is sent who is a person nominated under section 146 of the Companies Act 2006 (the ‘2006 Act’

to enjoy information rights (a ‘Nominated Person’) may, under an agreement between him/her and the member by whom he/she

was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the Annual General Meeting.

Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may, under any such agreement,

have a right to give instructions to the member as to the exercise of voting rights.

9. Website Giving Information Regarding the Annual General Meeting

Information regarding the Annual General Meeting, including information required by section 311A of the 2006 Act, and a copy of

this notice of Annual General Meeting is available from www.montanaro.co.uk.

10. Audit Concerns

Members should note that it is possible that, pursuant to requests made by members of the Company under section 527 of the

2006 Act, the Company may be required to publish on a website a statement setting out any matter relating to: (a) the audit of the

Company’s accounts (including the Auditor’s report and the conduct of the audit) that are to be laid before the Annual General

Meeting; or (b) any circumstance connected with an auditor of the Company ceasing to hold office since the previous meeting

at which annual accounts and reports were laid in accordance with section 437 of the 2006 Act. The Company may not require

the members requesting any such website publication to pay its expenses in complying with sections 527 or 528 of the 2006

Act. Where the Company is required to place a statement on a website under section 527 of the 2006 Act, it must forward the

statement to the Company’s auditor not later than the time when it makes the statement available on the website. The business

which may be dealt with at the Annual General Meeting includes any statement that the Company has been required under

section 527 of the 2006 Act to publish on a website.

Notice of Annual General Meeting continued

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 77

11. Members resolution

Under Section 338 and Section 338A of the Companies Act 2006, members meeting the threshold requirements in those sections

have the right to require the Company (a) to give to members of the Company entitled to receive notice of meeting, notice of any

resolution which may properly be moved and is intended to be moved at the meeting and/or (b) to include in the business to be

dealt with at the meeting any matter (other than a proposed resolution) which may be properly included in the business.

A resolution may properly be moved or a matter may properly be included in the business unless (a) (in the case of resolution

only) it would, if passed, be ineffective (whether by reason of inconsistency with any enactment or the Company’s constitution

or otherwise), (b) it is defamatory of any person, or (c) it is frivolous or vexatious. Such a request may be in hard copy form or in

electronic form, must identify the resolution of which notice is to be given or the matter to be included in the business, must be

authorised by the person or persons making it, must be received by the Company not later than 28 July 2022, being the date six

weeks before the meeting, and (in the case of a matter to be included in the business only) must be accompanied by a statement

setting out the grounds for the request.

12. Voting Rights

As at 23 June 2022 (being the latest practicable date prior to the publication of this notice) the Company had 18 9 ,427,6 0 0

Ordinary Shares in issue of £0.05 each. There were no Ordinary Shares held in treasury. Each Ordinary Share (other than those

held in treasury) carries one vote. The total voting rights in the Company as at 23 June 2022 were 18 9,427,6 0 0 votes.

13. Notification of Shareholdings

Any person holding 3 per cent or more of the total voting rights of the Company who appoints a person other than the Chairman

of the Annual General Meeting as his proxy will need to ensure that both he, and his proxy, comply with their respective disclosure

obligations under the UK Disclosure Guidance and Transparency Rules.

14. Further Questions and Communication

Under section 319A of the 2006 Act, the Company must cause to be answered any question relating to the business being dealt

with at the Annual General Meeting put by a member attending the meeting unless answering the question would interfere unduly

with the preparation for the meeting or involve the disclosure of confidential information, or the answer has already been given

on a website in the form of an answer to a question, or it is undesirable in the interests of the Company or the good order of

the meeting that the question be answered. Members who have any queries about the Annual General Meeting should contact

the Company Secretary, Link Company Matters Limited at 65 Gresham Street, London EC2V 7NQ. Members may not use any

electronic address provided in this notice or in any related documents (including the Annual Report and Accounts and proxy form)

to communicate with the Company for any purpose other than those expressly stated.

15. Documents Available for Inspection

The following documents will be available for inspection at the registered office of the Company during normal business hours on

any weekday (Saturdays, Sundays and English public holidays excepted) from the date of this notice until the conclusion of the

Annual General Meeting:

• 15.1 copies of the Directors’ letters of appointment; and

• 15.2 copies of the Directors’ deeds of indemnity.

None of the Directors has a service contract with the Company.

16. Personal data

Personal data provided by shareholders at or in relation to the Meeting will be processed in line with the Company’s privacy policy.

page 78 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Advisers

Investment Manager and Alternative Investment Fund

Manager (‘AIFM’)

MONTANARO ASSET MANAGEMENT LIMITED

53 Threadneedle Street

London EC2R 8AR

Tel: 020 7448 8600

Fax: 020 7448 8601

enquiries@montanaro.co.uk

www.montanaro.co.uk

Administrator

LINK ALTERNATIVE FUND ADMINISTRATORS LIMITED

Beaufort House

51 New North Road

Exeter EX4 4EP

Company Secretary

LINK COMPANY MATTERS LIMITED

65 Gresham Street

London EC2V 7NQ

Tel : 07709 515694

Contact: mesct@linkgroup.co.uk

Registered Office

16 Charlotte Square

Edinburgh EH2 4DF

Registrar

EQUINITI LIMITED

Aspect House

Spencer Road

Lancing

West Sussex BN99 6DA

Registrar’s Shareholder Helpline

Tel: 0371 384 2030*

Registrar’s Broker Helpline

Tel: 0906 559 6025

* Lines are open 8.30am to 5.30pm, Monday to Friday.

Stockbroker

CENKOS SECURITIES PLC

6-8 Tokenhouse Yard

London EC2R 7AS

Depositary

THE BANK OF NEW YORK MELLON

(INTERNATIONAL) LIMITED

One Canada Square

London E14 5AL

Custodian

BANK OF NEW YORK MELLON SA/NV

One Canada Square

London E14 5AL

Bankers

ING BANK N.V., LONDON BRANCH

60 London Wall

London EC2M 5TQ

Auditor

PRICEWATERHOUSECOOPERS LLP

Atria One

144 Morrison Street

Edinburgh EH3 8EX

Solicitor

DICKSON MINTO W.S.

16 Charlotte Square

Edinburgh EH2 4DF

Montanaro European Smaller Companies Trust plc

Registered in Scotland No. SC074677

An investment company as defined under Section 833

of the Companies Act 2006.

Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022 page 79

Notes

page 80 Montanaro European Smaller Companies Trust plc Annual Report and Accounts 2022

Notes

Montanaro European Smaller Companies Trust plc

16 Charlotte Square

Edinburgh

Scotland EH2 4DF

Tel: 020 7448 8600

Fax: 020 7448 8601

E-mail: enquiries@montanaro.co.uk

Website: www.montanaro.co.uk