Final Results

RNS Number : 8441G

JPMorgan Russian Securities PLC

08 February 2010

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST OCTOBER 2009

Chairman's Statement

Long term shareholders in this Company will be only too aware that investing in Russian equities is a rollercoaster ride that is not for the faint hearted. The Company's last two years illustrate this perfectly. In my annual statement last year, I had to report the disappointing news that the Company's total return on net assets had plummeted by 64.6% in the year to 31st October 2008, after five years of positive returns and out-performance of the Company's benchmark. In stark contrast, this year the Company's total return on net assets for the year to 31st October 2009 was +82.2%, compared to a return of +70.0% (in sterling terms) from the Company's benchmark, the MSCI Russian 10/40 Equities Indices Index. This performance means that the Company ranks as one of the top performing investment companies in the last year. Furthermore, while the average investment company is up some 50% over the last ten years, the Company is the top performing investment company over the last decade, up by 1,398% 1 (including the performance of The Fleming Russia Securities Fund Limited, the Company's predecessor). This represents a compound rate of return over the period of 31% per annum.

What is clear from these figures is that investing in Russian equities should be on a long term basis, and that there will continue to be challenging years for our investment managers. However, if investors keep their nerve through the difficult periods, the rewards are apparent.

The issues and challenges facing our investment managers, together with a performance review and outlook for the coming year can be found in the investment managers' report below.

Revenue and Earnings

Dividends paid by Russian companies declined materially in the year under review. The Revenue loss after taxation for the year to 31st October 2009 was £2,299,000, representing a revenue loss per share of 4.11p.

Authority to Repurchase the Company's Shares

During the year under review the Company did not repurchase any shares. However, the Company has repurchased 581,000 shares since the year end to manage imbalance between the supply and demand for the Company's shares. The Company considers utilising its buyback powers if the average discount exceeds 12% over a thirty day period.  The Board continues to believe that it is important that a repurchase facility is in place, and is therefore seeking approval from shareholders to renew the authority at the forthcoming Annual General Meeting.

Corporate Governance

The Company operates in accordance with corporate governance best practice. The Board has reviewed the investment management, secretarial and marketing services provided to the Company by JPMorgan Asset Management (UK) Limited. This annual review has included their performance record, resources and risk control mechanisms. This year the Board also devoted a strategy meeting to management processes and investment style. In conclusion the Board was satisfied with the results of the detailed review and therefore, in the opinion of the Directors, the continuing appointment of JPMAM for the provision of these services is in the interests of shareholders as a whole.

Board of Directors

In accordance with the Company's Articles of Association, James Nicholson and Lysander Tennant will be retiring by rotation at the forthcoming Annual General Meeting. A Nomination Committee of the Board, has met to consider the attributes and contribution of Mr Nicholson and Mr Tennant to the Board's deliberations. Following this review, the Board recommends to shareholders that, taking into account their respective investment experience, knowledge of the Russian market and contribution to the Board, both be re-elected. In compliance with the Board's succession planning, following the appointment of Mr Nianias in 2008, a Director will be standing down from the Board at the 2011 Annual General Meeting.

1 Source: AIC/Morningstar. 

 Articles of Association

At the Annual General Meeting, it is proposed that the Company adopt new Articles of Association. These latest amendments to the current Articles reflect the changes in company law brought about by the 2006 Act which came into effect on 1 October 2009, changes made to the 2006 Act in August 2009 (designed principally to implement the EU Shareholder Rights Directive in the UK) and some minor technical or clarifying changes. More details on the proposed changes to the Articles are given in the Directors' Report and in the Appendix to the Notice of Meeting in the Company's Annual Report & Accounts.

Although there are no immediate plans to increase the level of Directors' fees, the Board will further seek shareholder approval at the forthcoming Annual General Meeting to increase the maximum aggregate amount payable in directors' fees from £150,000 to £200,000 per annum.

Annual General Meeting

The Company's seventh Annual General Meeting will be held on Tuesday 9th March 2010 at 12.00 noon., at Trinity House, Tower Hill, London, EC3N 4DH. In addition to the formal part of the meeting, there will be a presentation from the Investment Managers who will answer questions on the portfolio and performance. There will also be an opportunity to meet the Board, the Investment Managers and representatives of JPMorgan Asset Management. I look forward to seeing as many of you as possible at this meeting.

Shareholders are asked to submit in writing any detailed or technical questions that they wish to raise at the AGM in advance to the Company Secretary at Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ. Alternatively you can lodge questions on the Company's website at jpmrussian.co.uk.

Outlook

The Russian risk reward proposition continues to look attractive and another year of positive returns for Russian equities is expected. The Company's investment managers believe that long-term returns for the Russian equity market should be in a range of 15-20%, but with considerable volatility. However this outlook is heavily dependent on three factors: oil price; global liquidity and global growth. As long as the economy continues to recover there should be more opportunities to generate reasonable returns, which our investment managers hope to achieve by continuing to prefer private sector companies over those owned and controlled by the state, with a bias towards domestic demand over commodity sectors.

Pamela Idelson Smith

Chairman

8th February 2010

Investment Managers' Report

Market Review

Twelve months ago the Russian stock market was considered by many market commentators to be doomed with no good news on the horizon. As history shows such times tend to be the ones that are later referred to as "a once in a lifetime opportunity" for investors. 2009 will be remembered in the same way as 1999 as a great year for recovery. The Russian market is well known for its high risk and volatility, ample evidence of which was provided by last year's massive rebound in prices. Although the Russian market is still almost 40% below the peak achieved back in May 2008, it has rebounded by 185% from the lows seen at the end of 2008.

JPMorgan Russian Securities outperformed its benchmark index last year by 12.2%. In the commentary below we have continued our practice of looking at the key issues in the market and for the companies or factors that have affected the results in the last year. Some of our points may sound familiar for our long term supporters; however we believe that it is important to stress these issues again:

• Volatility in Oil and Commodity Prices

During the Company's financial year there was a huge swing in sentiment and prices across commodities. The last quarter of 2008 and early 2009 witnessed the bottom of expectations for global economic growth. Commodity markets went through the painful experience of collapsing demand, collapsing prices and little clarity even in the   near term outlook. China yet again saved the commodity world by largely offsetting the double-digit declines in demand seen in the western economies. In financial markets, investors' appetite for commodities has seemed almost insatiable, with metals behaving like financial instruments rather than responding to the physical supply-demand environment. As a result Urals Crude rose by 131% from a low of US$ 32 per barrel in December 2008 to close our financial year at US$ 74. Similarly copper rose by 127% from US$ 2,845 per tonne to US $ 6,480 per tonne. What is clear is that this sharp V-shaped recovery in oil and metal prices saved the Russian economy from a prolonged period of recession. 

• Cheap and plentiful liquidity

Russia has been historically very dependent on external sources of funding. The main reason for this is the relatively small size of the Russian banking sector in comparison to the size of the country's GDP and even to the funding and investment requirements of major Russian corporates. These companies also borrow abroad due to the low level of domestic savings in absolute terms following a protracted history of high inflation and negative real interest rates paid to depositors. The current environment, of extremely low interest rates globally and a flood of liquidity injected by governments into the financial system, has quickly erased most concerns about immediate Russian corporate credit risks. Available cheap funding has given a window of opportunity for heavily indebted corporates to restructure their debts. Cheap liquidity was instrumental in the first wave of the 2009 rally in February - April when the lessening of fears about credit and bankruptcy risks supported the market.

• Politics and Country Specific Risk Factors

The sharp recovery in commodity prices reduced any urgency to implement reforms in Russia. This must be the largest disappointment for us as investors in Russia as the Government lost yet another opportunity to create better foundations to enable future positive developments. The absence of political debate on any crucial subject and an apparent lack of desire by the Russian Government to tackle harder decisions created a negative background for economic developments. Administrative interventions and pressure on businesses to avoid any large layoffs eliminated a great opportunity to make several sectors of the Russian economy more efficient and competitive in the global context.

Elections in the regional parliaments during the Autumn of 2009 brought back some Soviet-era memories of an authoritarian approach to opposition. Importantly society recognised the lack of leadership and vision among its rulers, which had been well masked by the great years of the commodity boom.

Overall we are concerned that the weakness of the political system and its underdeveloped structure in Russia could be an important stumbling block for future modernisation.

Performance Review

2009 was a great year for disciplined investors like ourselves who kept faith in our largest stock positions when we believed the underlying businesses were strong. We kept a fully invested position at the end of January 2009 and avoided the temptation of selling assets at rock bottom prices. The Company did not use leverage in the financial year to 31st October 2009 because of high volatility in the Russian equity market.

During the year we have been adjusting the portfolio in anticipation of different investment stories and their potential impact on financial markets. There were three large investment waves which worked well in 2009:

The first was the reduction in insolvency risk in the period from February to April 2009. During this period the best performers were companies with high leverage ratios and stretched balance sheets, for example Mechel. During 1Q09 the P/E multiple for Mechel looked absurdly high due to the very poor outlook for the company's profitability, if any. Its high debt level was also a constant threat to its survival. However state and state-controlled banks provided plenty of liquidity to support businesses, so the bankruptcy risk for this company was reduced by cash injections into the market. 

The second wave came in April and lasted till early June 2009, a wave that could be described as "Back to normality and business as a going concern". By April the market realised that the worst case scenarios about oil prices and a potential global economic collapse had not materialised. Russian companies had managed to cut their costs so drastically that even in such a challenging environment they were able to operate efficiently and in some cases quite profitably. These factors forced investors to reconsider asset valuations. A typical outperformer in this period was Magnit. This company was able to sustain 20+% annual growth despite the collapse of the price of oil. In an environment in which all companies had been penalised by aversion to market risk, it represented an opportunity to buy a high quality business at a lower valuation.

Finally the last investment wave started in August -September 2009 and was all about earnings revisions. Investors came into the market on the back of earnings surprises after the second quarter of 2009 when 70+% of companies that reported produced numbers ahead of investor expectations. As a result analysts had to revise upwards their earnings expectations, which clearly had been set too low. Sberbank was a good example of an out-performer in this period.

Despite the Company's strong out-performance against the benchmark index, there were, in hindsight, some investment decisions which detracted from performance.  Our biggest mistake last year was not utilising gearing in February, despite our fairly bullish view on the market at that time. The reluctance to gear followed a year of 80% losses, global panic and material underperformance against the benchmark. Another lost opportunity was our early decision to sell companies with poor balance sheets, which led to a reduction of relative beta in the portfolio vs. the Russian market in the first quarter of the Company's financial year. This decision has turned out to be premature, but we did not want to compromise our investment approach and believe that it remains a good decision in the long-term.

Outlook

We expect that in the long run the Russian equity market will progress towards more typical levels of volatility and returns. After two years of extremely volatile markets in 2008 and 2009, it is important to remind shareholders of what we think is a "normalised" expected return from Russian equities. As long as the capital base is relatively small and the cost of capital and risks related to the business activity remain relatively high, the likely returns on equity for companies should be in the range of 15-20% per annum. These should be seen as "normalised" levels of returns for the Russian equity market over the long term.

We strongly believe that on a risk adjusted basis Russian equities continue to offer very good value for long-term investors. The country has good economic pre-conditions (natural resources, human capital, basic infrastructure) for an extended period of well above average economic growth.

Oleg Biryulyov

Vitaly Kazakov

Investment Managers

8th February 2010

Principal Risks

With the assistance of the Manager, the Board has drawn up a risk matrix, which identifies the key risks to the Company. These key risks fall broadly under the following categories:

• Investment Underperformance: An inappropriate investment strategy, for example asset allocation, the level of gearing or the degree of portfolio risk, could lead to underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. The Board manages these risks by diversification of investments and through a set of investment restrictions and guidelines which are monitored and reported on by the Manager. JPMorgan Asset Management (UK) Limited ('JPMAM') provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the Investment Manager, who attends all Board meetings, and reviews data which show statistical measures of the Company's risk profile. The Board holds a separate meeting devoted to strategy each year.

• Loss of Investment Team or Investment Manager: A sudden departure of several members of the investment management team could result in a short-term deterioration in investment performance. The Manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team based approach, as well as special efforts to retain key personnel.

• Discount: A disproportionate widening of the discount relative to the Company's peers could result in loss of value for shareholders. In order to manage the Company's discount, which can be volatile, the Company operates a share issuance and repurchase programme.

• Market: Market risk arises from uncertainty about the future prices of the Company's investments. It represents the potential loss that the Company might suffer through holding investments in the face of negative market movements. The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines, which are monitored and reported on by JPMAM. The Board monitors the implementation and results of the investment process with the Manager.

• Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 842 of the Income and Corporation Taxes Act 1988 ('Section 842'). Details of the Company's approval are given under "Business of the Company" above. Were the Company to breach Section 842, it might lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. The Section 842 qualification criteria are continually monitored by JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 2006 and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules. A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules could result in the Company's shares being suspended from listing which in turn would breach Section 842. The Board relies on the services of its Company Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Act 2006 and the UKLA Listing Rules.

• Corporate Governance and Shareholder Relations: Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance report within the Annual Report.

• Operational: Disruption to, or failure of, JPMAM's accounting, dealing or payments systems or the custodian's records could prevent accurate reporting and monitoring of the Company's financial position. Details of how the Board monitors the services provided by JPMAM and its associates and the key elements designed to provide effective internal control are included within the Internal Control section of the Corporate Governance report within the Annual Report.

• Financial: The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk and credit risk. Bank counterparties are subject to daily credit analysis by the Manager and regular consideration at meetings of the Board.

• Political and Economic: Changes in financial or tax legislation, including in the European Union, may adversely effect the Company. The Manager makes recommendations to the Board on accounting, dividend and tax policies, and seeks external advice where appropriate. In addition, the Company is subject to administrative risks, such as the imposition of restrictions on the free movement of capital.

Directors' Responsibilities

The Directors each confirm to the best of their knowledge that:

(a) the accounts, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

(b) the Annual Report includes 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 face.

Pamela Idelson Smith

Chairman

8th February 2010

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at www.jpmrussian.co.uk.

For further information please contact:

Alison Vincent

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

020 7742 6000

Income Statement

for the year ended 31st October

	Revenue £'000	2009 Capital £'000	Total £'000	Revenue £'000	2008 Capital £'000	Total £'000
Gains/(losses) on investments held at fair value through profit or loss	-	119,124	119,124	-	(256,143)	(256,143)
Net foreign currency gains/(losses)	-	554	554	-	(5,242)	(5,242)
Income from investments	885	-	885	9,482	-	9,482
Other interest receivable and similar income	65	-	65	150	-	150
Gross return/(loss)	950	119,678	120,628	9,632	(261,385)	(251,753)
Management fee	(2,391)	-	(2,391)	(6,007)	-	(6,007)
VAT recoverable on management fee	-	-	-	636	-	636
Other administrative expenses	(719)	-	(719)	(900)	-	(900)
Net return/(loss) on ordinary activities before finance costs and taxation	(2,160)	119,678	117,518	3,361	(261,385)	(258,024)
Finance costs	(69)	-	(69)	(1,581)	-	(1,581)
Net return/(loss) on ordinary activities before taxation	(2,229)	119,678	117,449	1,780	(261,385)	(259,605)
Taxation	(70)	-	(70)	(1,251)	-	(1,251)
Net return/(loss) on ordinary activities after taxation	(2,299)	119,678	117,379	529	(261,385)	(260,856)
Return/(loss) per share (note 2)	(4.11)p	213.97p	209.86p	0.95p	(467.32)p	(466.37)p

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies. The Total column represents all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ('STRGL'). For this reason a STRGL has not been presented.

Reconciliation of Movements in Shareholders' Funds

	Called up share capital £'000	Other reserve £'000	Capital redemption reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31st October 2007	559	52,397	42	352,914	(2,398)	403,514
Net return/(loss) on ordinary activities	-	-	-	(261,385)	529	(260,856)
At 31st October 2008	559	52,397	42	91,529	(1,869)	142,658
Net return/(loss) on ordinary activities	-	-	-	119,678	(2,299)	117,379
At 31st October 2009	559	52,397	42	211,207	(4,168)	260,037

Balance Sheet

at 31st October

		2009 £'000	2008 £'000
Fixed assets
Investments held at fair value through profit or loss		261,277	132,743
Investment in liquidity fund held at fair value through profit or loss		431	10,565
Total investment portfolio		261,708	143,308
Current assets
Debtors		3,207	5,627
Cash and short term deposits		16	177
		3,223	5,804
Creditors: amounts falling due within one year		(4,894)	(6,454)
Net current liabilities		(1,671)	(650)
Total assets less current liabilities		260,037	142,658
Capital and reserves
Called up share capital		559	559
Other reserve		52,397	52,397
Capital redemption reserve		42	42
Capital reserves		211,207	91,529
Revenue reserve		(4,168)	(1,869)
Shareholders' funds		260,037	142,658
Net asset value per share (note 3)		464.9p	255.1p

Cash Flow Statement

for the year ended 31st October

		2009 £'000	2008 £'000
Net cash inflow/(outflow) from operating activities		2,761	(2,811)
Returns on investments and servicing of finance
Interest paid		(69)	(1,722)
Capital expenditure and financial investment
Purchases of investments		(178,573)	(475,189)
Sales of investments		175,534	501,476
Other capital charges - handling fees		(368)	(189)
Net cash inflow/(outflow) from capital expenditure and financial investment		(3,407)	26,098
Net cash inflow/(outflow) before financing		(715)	21,565
Financing
Net drawdown/(repayment) of loans		25	(40,275)
Net cash inflow/(outflow) from financing		25	(40,275)
Decrease in cash for the year		(690)	(18,710)

Notes to the Accounts

for the year ended 31st October 2009

1. Accounting policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' (the 'SORP') issued by the AIC in January 2009. All of the Company's operations are of a continuing nature.

2. Return/(loss) per share

	2009	2008
	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return/(loss)	(2,299)	529
Capital return/(loss)	199,678	(261,385)
Total return/(loss)	177,379	(260,856)
Weighted average number of shares in issue	55,932,812	55,932,812
Revenue return/(loss) per share	(4.11)p	0.95p
Capital return/(loss) per share	213.97p	(467.32)p
Total return/(loss) per share	209.86p	(466.37)p

3. Net asset value per share

The net asset value per share is based on the net assets attributable to the ordinary shareholders of £260,037,000 (2008: £142,658,000) and on the 55,932,812 (2008: 55,932,812) shares in issue at the year end.

4. Status of announcement

2008 Financial Information

The figures and financial information for 2008 are extracted from the published Annual Report and Accounts for the year ended 31st October 2008 and do not constitute the statutory accounts for that year.  The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 237(2) or section 237(3) of the Companies Act 1985.

2009 Financial Information

         The figures and financial information for 2009 are extracted from the Annual Report and Accounts for the year ended 31st October 2009 and do not constitute the statutory accounts for the year.  The Annual Report and Accounts includes the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

Annual Report and Accounts

The Annual Report and Accounts will be posted to shareholders on or around 10th February 2010 and will shortly be available on the Company's website (www.jpmrussian.co.uk ) or in hard copy format from the Company's Registered Office, Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ. 

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

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