MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

Date:                21 November 2011

HALF YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2011

Investment Objective

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

Highlights

·      Share price -23.0%

·      Net asset value ('NAV') per Ordinary Share -27.9%

·      Benchmark index -28.1%

·      Total assets -21.3% (£80.7 million)

Chairman's Statement

During the six month period ended 30 September 2011, the Company's net asset value ('NAV') per share fell by 27.9% to 386.2p. This compares to a fall of 28.1% in the benchmark index, the MSCI Europe Small Cap (ex UK) Index. The share price at the end of the period was 359.5p, representing a discount of 6.9% to the NAV per share.

Despite the fall in the NAV per share during the period under review, it is pleasing to report that it is now more than five years since Montanaro Asset Management was appointed as the Company's Manager and, during the period since its appointment in September 2006, the NAV per share increased by 13.0% compared with a fall of 7.2% in the benchmark index.

During the period under review, the significant decline in stock markets across Europe, and hence in the Company's NAV per share, was attributable to increasing concerns about the sovereign debt and banking crises in the Eurozone. The uncertainties and concerns escalated towards the end of the period as politicians sought solutions to the problems, leading to a sharp fall in stock market valuations and a significant increase in volatility. 

However, throughout the period, trading results from companies generally have continued to be somewhat ahead of expectations. Following significant cost cutting and restructuring during the financial crisis in 2008 and 2009, companies have established strong balance sheets, thereby providing some protection from the current uncertainties.

Treasury Shares

During the period, the Company sold its entire holding of 875,000 Ordinary Shares from treasury at a price of 459.6p per share. These shares were issued in accordance with the Board's stated policy, which is to issue shares at a discount to the NAV per share provided that such discount is narrower than the weighted average discount to the NAV per share at the time the shares were bought back by the Company.

The sale of shares from treasury increased the number of shares in issue by 5.3%.

Earnings and Dividends

Revenue earnings per share for the period were 6.2p (2010: 3.4p). Despite the significant macro economic uncertainties, company results were, as stated above, generally ahead of expectation during the period, resulting in increased dividend payments from many of the companies within the portfolio.

The Board has declared an unchanged interim dividend of 1.75p per Ordinary Share, payable on 6 January 2012 to shareholders on the register on 9 December 2011.

Borrowings

The Company's level of gearing, net of cash, was 11.8% as at 30 September 2011.

Outlook

The months ahead will be dominated by the resolve and ability of politicians to deal with the crisis in the Eurozone. The outcome will impact the outlook for global economic growth. Stock markets are already discounting an economic slowdown within Europe and, until investor confidence returns, markets are likely to remain volatile.

The companies that we are invested in have strong managements, sound finances and good business franchises. During this period of uncertainty, the Company will continue to focus on investing in such quality smaller companies where the Board continues to believe there are attractive opportunities for good long term returns.

A R IRVINE

Chairman

Consolidated Statement of Comprehensive Income

for the six months ended 30 September 2011 (unaudited)

The total column of this statement represents the Group's Income Statement and Statement of Comprehensive Income, prepared in accordance with IFRS.

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.

All of the profit/(loss) and total comprehensive income for the year is attributable to the owners of the Company.

Consolidated Statement of Comprehensive Income

for the six months ended 30 September 2010 (unaudited)                                                                   

The total column of this statement represents the Group's Income Statement and Statement of Comprehensive Income, prepared in accordance with IFRS.

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.

All of the profit and total comprehensive income for the year is attributable to the owners of the Company.

Consolidated Statement of Comprehensive Income

For the Year Ended 31 March 2011 (audited)

The total column of this statement represents the Group's Income Statement and Statement of Comprehensive Income, prepared in accordance with IFRS.

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.

All of the profit and total comprehensive income for the year is attributable to the owners of the Company.

Group Balance Sheet

As at 30 September 2011

Consolidated Statement of Changes in Equity

For the six months ended 30 September 2011 (unaudited)              

Consolidated Statement of Changes in Equity

For the six months ended 30 September 2010 (unaudited)

Consolidated Statement of Changes in Equity

For the year ended 31 March 2011 (audited)

Condensed Group Statement of Cash Flows

 Statement of Principal Risks and Uncertainties

The principal risk faced by the Company is that it fails to produce the capital appreciation stated as its objective, and its net asset value does not rise over the longer-term.  The risks which might give rise to this can be categorised as external, manager, investment and strategy, portfolio liquidity, gearing, regulatory, operational, financial, banking and reputational.  In addition, shareholders face the risks of liquidity of the Company's shares and discount volatility.

These risks, and the way in which they are mitigated, are described in more detail under the heading Principal Risks and Risk Mitigation in the Report of the Directors in the Company's Annual Report for the year ended 31 March 2011.  The Company's principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Company's financial year.

Directors' Responsibility Statement in Respect of the Half Yearly Financial Report

We confirm that to the best of our knowledge:

·      the condensed set of consolidated financial statements has been prepared in accordance with IAS 34 'Interim Financial 
Reporting' and give a true and fair view of the assets, liabilities, financial position and loss of the Company;

·      the Chairman's Statement (constituting the Interim Management Report) includes a fair review of the information 
required by the Disclosure and Transparency Rules ('DTR') 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of consolidated financial statements;

·      the Statement of Principal Risks and Uncertainties shown above is a fair review of the information required by DTR 
4.2.7R; and

·      The condensed set of financial statements includes a fair review of the information required by DTR 4.2.8R, being 
related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board

A R IRVINE

Director

Notes to the Accounts

1.         The unaudited interim finacial statements have been prepared on the basis of the accounting policies set out in the 
statutory financial statements of the Group for the year ended 31 March 2011 and in accordance with International Accounting Standard ('IAS') 34 'Interim Financial Reporting'.

2.         Earnings for the first six months should not be taken as a guide to the results for the full year.

3.         Management expenses

4.         Earnings per Ordinary Share is based on a weighted average of 16,943,452 Ordinary Shares in issue during the period (year end 31 March 2011: 16,573,260; six months ended 30 September 2010: 16,573,260), excluding those shares bought back and held in treasury.

5.         The interim dividend of 1.75 pence per Ordinary Share will be paid on 6 January 2012 to shareholders on the register on 9 December 2011.

6.         The net asset value per Ordinary Share is based on 17,448,260 Ordinary Shares in issue at the end of the period (31 March 2011: 16,573,260; 30 September 2010: 16,573,260), excluding those shares bought back and held in treasury.  As at 30 September 2011 there were no shares held in treasury (31 March 2011: 875,000; 30 September 2010: 875,000).

7.         The Group results consolidate those of MESCT Securities Limited, a wholly owned non-trading subsidiary.

8.         These are not statutory accounts in terms of Section 434 of the Companies Act 2006 and have not been audited or reviewed by the Company's auditors.  The information for the year ended 31 March 2011 has been extracted from the latest published financial statements which received an unqualified audit report and have been filed with the Registrar of Companies.  No statutory accounts in respect of any period after 31 March 2011 have been reported on by the Company's Auditors or delivered to the Registrar of Companies. The Half-Yearly Financial Report is available on the Manager's website: www.montanaro.co.uk.

For further information please contact:

Charles Montanaro

Montanaro Asset Management Limited

Tel: 020 7448 8600