Final Results

RNS Number : 3572A

JPMorgan Russian Securities PLC

20 January 2020

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

ANNOUNCEMENT OF FINAL RESULTS

The Directors of JPMorgan Russian Securities plc announce the Company's results

for the year ended 31st October 2019

HIGHLIGHTS

-     Total return to shareholders +45.4%

-     Return on net assets +31.7% (Benchmark +32.5%)

-     Ordinary dividend 35.0p (2018: 26.0p)

Legal Entity Identifier:

549300II3MHI98ZLVH37 Information disclosed in accordance with DTR 4.1.

CHAIRMAN'S STATEMENT

Performance and Overview

I am pleased to report that in the year to 31st October 2019 the Company's total return to shareholders comfortably outperformed the benchmark, with a rise of 45.4%. The outperformance was attributable to the significant narrowing of the discount at which the Company's shares trade relative to its net asset value. As at 31st October 2019 the Company's discount was 11.1%. Over the reporting period, the discount averaged 14.9%, and ranged from 8.9% to 19.0%. The narrowing discount is welcome and has been assisted by the Board's share buy back programme. From the Company's financial year end to 15th January 2020, the benchmark index rose 12.9% and the Company's return to shareholders rose 14.1%, and the discount stood at 10.0%.

The Company's total return on a net assets basis was 31.7%, slightly underperforming its benchmark, the RTS Index in sterling terms, by 0.8%. To put into context the positive performance of the Company, it is worth noting that the Company's net asset value performance has ranked number one, ahead of all its peers not just in the year under review, but also in the three and five year periods. The Company's peer group includes eleven other funds, including ETFs and open ended funds.

The Russian economy grew although at a slower rate than the previous year and oil prices, which are a key factor in the performance of the Russian economy, were lower than the previous year. Consumer demand remained subdued and stocks reliant on the domestic market performed less well than exporters. The investment manager continued to focus on holding stocks that have strong balance sheets, good governance and are likely to maintain a high pay out ratio. Thus the focus in the portfolio on energy and materials.

The economic sanctions that the US and European Union applied to Russia in 2014 continue to weigh on the Russian market although there are signs that the Russian economy has adjusted to the situation. JPMorgan Asset Management's compliance & investment functions monitors all investments and the Company is assured by JPMorgan Asset Management that processes are in place to ensure that the Company remains compliant with the current sanctions regime. In addition, the political and economic developments and risks in the region are closely monitored. The Board carries out regular reviews of the Company's risk profile during the year and you will see details of what we judge to be the key risks set out on page 20 of the Company's Annual Report and Financial Statements. The Company's Manager maintains a diversified portfolio which adheres to the Company's investment and risk control guidelines.

Objective and Strategy of the Company

Each year the Board reviews the strategy of the company in the context of the external environment in which it operates. There has been no change in the Strategy of the company which remains to deliver the maximum total return from a diversified portfolio of investments predominantly in Russia. This year we paid particular attention to how the Manager takes into account Environmental, Social and Governance issues (ESG) when making investments. More details of this are given below. Whilst the Manager is seeking to maximise total return and is not specifically seeking income producing stocks, in recent years the level of pay out from Russian stocks has risen considerable so materially contributing to the total return on the portfolio. This year the yield on the Company's shares, based on the closing share price for the year was 5.0% and the outlook for dividends remains positive as the Russian state, a major shareholder in many of the stocks we hold, looks for higher levels of dividend payments. More information is given on this in the Manager's Report.

The Board reviewed the work undertaken by JPMorgan on environmental, social and governance matters (ESG) in relation to the portfolio your Company is invested in. An increasingly broad spectrum of investors now rightly focus on ESG issues when considering their investments. The Company is aware of this trend. For many years the Company's Investment Managers have taken them into account in their investment process, particularly governance factors to ensure that shareholder and manager's interests are as closely aligned as possible. The Investment Managers regularly engage on ESG issues in meetings with company management. We believe that companies that address ESG issues and adopt sustainable business practices are better placed to generate sustainably strong performance and create enduring value for shareholders. Further details regarding the Company's approach to ESG can found on pages 10 and 22 of the Company's Annual Report and Financial Statements. The Manager also exercises the Company's proxy votes in a prudent and diligent manner in the interests of our shareholders. Further details of the Company's approach to Proxy Voting and Stewardship/Engagement can be found on page 30 of the Company's Annual Report and Financial Statements.  

The Board has again reviewed the marketing strategy of the company as we have a long standing wish to increase the demand for the shares which should narrow the discount at which the company trades to NAV, and to diversify the shareholder base. Whilst investing in Russia is not for everyone we feel that the growth prospects that Russia offers, combined with the substantial level of dividends from leading companies should make it attractive to more potential shareholders. We continue to press JPMorgan to market the trust more vigorously.

Dividends

Revenue for the year, after taxation, was £19,139,000 (2018: £15,077,000) and the revenue return per share, calculated on the average number of shares in issue, was 40.04p (2018: 29.58p). Based upon the revenue generated by the portfolio, an interim dividend of 25.0p per share in respect of the year ended 31st October 2019 was paid on 25th October 2019. The Company receives the most of its dividend income well before the end of its financial year ending 31st October, and hence it considers it appropriate to distribute the large majority of its net income as an interim dividend. The Board now proposes a final dividend of 10.0p per share in respect of the year ended 31st October 2019, making a total of 35.0p per share for the year (2018: 26.0p per share). The final dividend is proposed to be paid on 13th March 2020 to ordinary shareholders on the register at the close of business on 7th February 2020. If approved by shareholders, the final dividend will amount to £4,615,000, 10.0p per share (2018: £2,905,000, 6.0p per share). The Board reviews income expectations throughout the year. Should income receipts permit, the Company will continue to make payment of an interim dividend, as well as a final dividend in 2020.

Discount Control

The Board continues to use the share repurchase authority to assist in managing any imbalance between supply and demand for the Company's shares, thereby reducing the volatility of the discount. Following discussion with the Company's major shareholders in 2017 the Board agreed that, subject to market conditions, it would increase its buy back activity with a view to buying back at least 6.0% of its issued share capital per annum. During the course of the recent 12 month period 2,945,604 shares were bought back, approximately 6.3% of the Company's issued share capital at 31st October 2018. As identified in the Performance Attribution table on page 11 of the Company's Annual Report and Financial Statements, this added 1.0% to the Company's NAV return. The average discount at which these shares were bought back was 14.7% and these buybacks represented approximately 16.1% of traded market volume during the period in which they were undertaken. The policy was initiated in January 2018 and it is pleasing that this year the buy back policy has had its desired effect of narrowing the discount for much of the year. The Board will seek authority to renew the Company's share issuance and buyback powers at the forthcoming Annual General Meeting ('AGM').

Board of Directors

As mentioned in my Chairman's Statement for the Company's Half Year to 30th April 2019, in accordance with the Company's Succession Plan we engaged an independent search consultancy to recommence the search for a non-executive director to replace George Nianias. On the 1st November 2019 the Company announced that both George Nianias and Alexander Easton were retiring as non-executive directors on 31st October 2019. George had joined the Company as a director in 2008 and Alex in 2010. The Board would like to thank then both for their very considerable contributions to the Company over the years, and in particular for providing invaluable insight into the Russian business environment and markets. After consideration of a strong selection of candidates, the Board was very pleased to announce on 1st November 2019, that Nick Pink and Ashley Dunster were appointed as a non-executive directors on the same day. Nick Pink has extensive senior management experience in financial services with previous roles at UBS Investment Bank including Global Head of Research, Head of European Research, Head of Asia Research and Head of European Equities. Ashley Dunster has extensive investment management experience of funds investing in Russian companies and was Chief Investment Officer of Capital Group's Private Equity business until the end of 2018 when he retired after 21 years service. In compliance with corporate governance best practice, all Directors will be standing for re-appointment at the forthcoming AGM. Following the Company's annual evaluation of the existing Directors, the Chairman, the Board and its Committees, the Board recommends to shareholders that all directors standing, including the two recently appointed, be reappointed.

The Company's Directors fees were last increased with effect from 1st November 2018. The Board has agreed that the current fees should remain unchanged.

Investment Manager

Oleg Biryulyov and Habib Saikaly continue to be the Company's Investment Managers. They are supported by JPMorgan Asset Management's Emerging Markets and Asia Pacific equities team (EMAP), which consists of approximately 100 investment professionals. Oleg and Habib attend each Board meeting and the Strategy day to enable an appropriate level of challenge and debate to occur. In addition, the Board reviews the performance of all the other services provided by the Investment Manager each year and I am pleased to say that the service the Trust receives from JPMorgan is generally excellent.

Annual General Meeting

The Company's AGM will be held on Monday, 2nd March 2020 at 2.30 p.m., at 60 Victoria Embankment, London EC4Y 0JP. In addition to the formal part of the meeting, there will be a presentation from Oleg Biryulyov, who will be available to answer questions on the portfolio and performance. There will also be an opportunity to meet the Board, the Investment Manager and representatives of JPMF and JPMAM. 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 60 Victoria Embankment, London EC4Y 0JP. Alternatively you can lodge questions on the Company's website at www.jpmrussian.co.uk.

Outlook

This year the Russian equity market performed well ahead of expectations with its return of 49% beating global markets including its emerging market competitors. Whilst companies have been performing well, and the level of dividends paid out has risen substantially, this is still a striking performance which we would not expect to see repeated at this elevated level. Nevertheless, the fundamentals of the market remain strong as even after this price rise, the market trades on a PE much lower than developed markets. Given the continuing low level of interest rates in most major economies, the level of dividend payouts by Russian companies should continue to attract investors. We are optimistic that the market, and our portfolio in particular, should be resilient. That said, there are still many uncertainties in the global economic and political environment that could cause upsets, not least the trend to protectionism that will not be good for international trade and hence economic development. All markets are to a degree unpredictable and the Russian one is more so than most given the political positioning of Russia in the world and its domestic politics, as illustrated by the recent resignation of the Russian Government following the President's proposed constitutional reforms. At the time of writing this change is not expected to have any significant impact on the Russian market. However the country has high quality companies and if sentiment towards the country improves this should be reflected in the long term performance of the market.

Gill Nott

Chairman

20th January 2020

investment managers' report

Economic backdrop: uncertainty prevails but sanctions fears recede

The health of the broader global economy dominated minds over the year to 31st October 2019, with a marked economic slowdown and ongoing political and geopolitical upheaval creating an uncertain environment for investors. The year was characterised by a cavalcade of global issues rather than local ones. In Russia, the economy still grew but at a slower pace. The ongoing trade wrangles between China and the United States dominated news flow, although the shift in US monetary policy, the strength of the US dollar and the trajectory of oil price movements were also significant influencers. Although the thorny topic of Russian sanctions did not disappear and remains fluid, optimism increased that the worst of this particular storm may have been weathered: there were no fresh sanctions from the United States this year so the spotlight of attention shifted to the Chinese-US wrangles, allowing Russian investment markets to progress relatively unhindered.

Economic growth was fragile across most of the world. The Russian economy still grew - albeit at a more moderate rate than last year, with negative sanctions noise and concerns over corporate governance both still casting a shadow. However, there are tentative signs of recovery, with more recent stability in oil and currency prices positive indicators. Rising dividend payments from several of Russia's largest companies, as part of a broader transformation of distribution policy, have been significant drivers and dividend yields in aggregate are significantly higher than for other emerging markets. Energy giant Gazprom soared this year, as we will discuss later, and its enhanced dividend policy announcement was the key.

Oil prices, so pivotal to the fortunes of the Russian economy, trended lower: the average price of Brent crude oil over the review period was US$56 compared with US$65 for the Company's previous financial year.

Whilst it is true that domestic consumption is likely to be constrained by relatively low incomes in the short-term and that the rouble could remain weaker than it should be (in the aftermath of sanctions) these factors do not deter stock pickers like ourselves. We can counter any negative and uncertain conditions by sticking to quality and income-generating businesses and by prioritising exporters that can source growth opportunities from elsewhere in the world over domestic names where we are underweight.

Although global trade fears cast their shadow over the whole of the Company's review period, sentiment did improve somewhat after the US Federal Reserve led other central bank policy makers in changing direction and cutting interest rates. Russia's central bank followed suit, cutting rates four times so far in 2019, in an attempt to offset other risks, kick-start the economy and reduce household bills. Despite this, consumers and businesses remained risk-averse and wary on the uncertain economic outlook.

Market review: Russian markets make considerable progress

Against this uncertain macro backdrop, and a deteriorating global economic outlook, Russian stock market valuations defied expectations, outperforming their emerging market peers by a considerable margin. Returns were amongst the biggest anywhere in the world, with high and increasing dividend yields a real attraction for investors seeking higher-paying assets.

For the year to 31st October 2019, the Company's net asset value rose by 31.7% on a total return basis, marginally behind the benchmark, the RTS Index, which rose by an equivalent 32.5%. The total return to shareholders was an emphatic 45.4% in sterling terms, partly reflecting a narrowing of the discount over the year to 11.1% (31st October 2018: 19.0%).

Our approach to uncovering value

The Company remains the only investment trust providing pure exposure to the ongoing transformation of the Russian economy and we strive to uncover the value in Russian equities. We aim to build a balanced portfolio of stocks from across the Russian market, with a focus on companies that demonstrate the best long-term growth opportunities. To do this, we actively manage the portfolio and continue to build up our internal research capabilities and a growing team of analysts with deep expertise in this complex and under-researched market. We base our decisions on a proven investment process that analyses the specific characteristics of stocks. We believe that an active approach makes sense when investing in Russia, given the market concentration and corporate governance issues.

Integrating ESG into the investment process

Investors want to know that their managers are aware of ESG issues, that they take them into account in building their portfolios and that they raise issues directly with investee companies. Simplistic negative or positive screening has dwindled in popularity. Investors expect to see an integrated approach to ESG and that this approach is clearly linked to driving financial returns, both through portfolio construction and stewardship. JPMorgan Asset Management has long been a leader in using such an integrated approach, seeking companies that run their businesses in a sustainable way, treating minority shareholders fairly and engaging in practices likely to enhance the company's reputation, not compromise it.

We believe that ESG factors, particularly those related to governance, will play a critical role in a long-term investment strategy. Companies that address ESG issues and adopt sustainable business practices are better placed to maximise their performance and create enduring value for shareholders.

In our view, corporate governance issues have the most direct bearing on the risk/reward profile of the Company's portfolio; as such it is the area most integrated into our investment process. However, environmental concerns are an ever-increasing part of the investment landscape in part due to the impact they can have on investment returns and cash flows; where relevant we make an assessment of environmental issues and include them in our decision-making process. Where social issues are relevant, again the focus is on the economic impact of the involvement.

We use an active bottom-up process, with emphasis placed on direct contact with companies. ESG is fully integrated into the investment process, with ESG factors systematically and explicitly considered through a Risk Profile analysis on the economics, duration (which includes sustainability) and governance of a company; this is to ensure there is due focus on potential risks. Three quarters of the issues addressed focus on governance and specific ESG questions, including shareholder returns, management strength and the track record on environmental and social issues. Through this process, we seek to understand the company specific or external factors which could negatively impact the company and identify issues to be addressed in future engagements.

We have recently enhanced our Risk Profile process, and a Strategic Classification of Premium, Quality or Trading is assigned to portfolio companies. This is an assessment of a company's potential for long term value creation, referencing the number of issues or 'red flags' identified through the Risk Profile analysis.

Whilst acknowledging that the majority of the Company's portfolio is held in energy companies, we seek to identify investee companies that run their businesses in a sustainable and efficient way, with high quality board decision-making, and aim to influence their behaviour and encourage best practice through dialogue. While we are always focussed on efficient use of capital and efficient capital structures we have engaged broadly on multiple topics that affect valuation and propriety.

How have specific stocks and sectors fared over the year?

In this section, we consider how specific stock decisions over the year under review impacted portfolio performance.

Stock rotations were made over the period to adjust the overall risk level of the portfolio. Given the ongoing volatility of the global geopolitical and economic backdrop we have been reducing our exposure to smaller, less liquid stocks in favour of larger, better-placed alternatives - high quality companies that can generate earnings sustainably over the long-term. As always, the characteristics of individual stocks are more significant to us than sectoral decisions. Looking ahead, there are various destabilising concerns that could continue to unsettle markets so our focus will remain on proven 'best of breed' stocks.

Our holdings in the Energy sector dominate the Company's portfolio; more than half of the portfolio's value is invested here, including five of our Top Ten holdings. We ended the year marginally overweight to the sector relative to the benchmark index and our Energy stocks in aggregate delivered robust performance, although there were individual stock success stories and disappointments across the portfolio.

PERFORMANCE ATTRIBUTION

YEAR ENDED 31ST OCTOBER 2019

	%	%
Contributions to total returns
Benchmark return		32.5
Asset allocation	1.5
Stock selection	-1.0
Gearing/(net cash)	-0.4
Investment Manager contribution		-0.5
Portfolio return		32.0
Management fee/other expenses	-1.3
Share buyback	1.0
Return on net assets		31.7
Effect of movement in discount over the year		13.7
Return to shareholders		45.4

Leading state gas producer - and lynchpin of Russia's energy-reliant economy - Gazprom ended the period as the Company's largest holding. Its July announcement of record dividends for its shareholders (equivalent to 27% of net profits for 2018) delivered a huge surprise and a share price surge that lifted the entire market. Gazprom's shares make up more than 10% of the index and the company's move followed pressure from Russia's finance ministry that state companies should pay out at least 50% of net profits in dividends. We already held an active position in the stock before the rally commenced so we were fully able to participate in the market's powerful reaction. Significantly, with markets remaining hesitant, we think Gazprom shares still offer very good value, on both a price-to-earnings ratio and dividend yield basis.

Elsewhere in the Energy sector, we exited oil and gas company Surgutneftegas completely after receiving dividend payments from the stock. The company's subsequent share price spike (driven by speculation on how it may invest the huge cash pile on its books rather than any concrete evidence on its future strategic plan) was a very negative, short-term hit for us and a notable detractor from overall performance. Surgutneftegas may be one of Russia's largest companies but it is also one of the country's most secretive entities, with limited disclosure of its ownership structure, broader governance and strategic plans - specifically how it plans to invest the circa $47 billion in currency deposits it has been accumulating over many years. Following our earlier optimism over the company's potential we now prefer to remain on the sidelines until it presents a clear investment case. We are not alone in this stance, which, in our case, was also influenced by currency movements that caused foreign exchange losses of $2.5 billion in the first half of 2019 and is bound to be detrimental to future dividend prospects. In 2018, dividends were equivalent to a 22% yield whereas for 2019 they could plummet as low as 1.5-2%, well below the 7% from Gazprom and a potential 8-10% from Rosneft or Tatneft.

We are overweight to the Materials sector, thanks to our investments in Polyus, Norilsk Nickel and Polymetal, which are all Top Ten holdings. We still see good value in these names based on the outlook for Gold, Nickel and Silver as well as these companies' high dividend yields. We sold out of diamond mining group Alrosa on the back of a disappointing pricing cycle and the potential for the company's dividends to be downgraded. We sold steel producer MMK for similar reasons, as we see future pressure on earnings coming from stronger raw material prices and a potential squeeze on margins. We continue to avoid aluminium group RUSAL for corporate governance reasons and Ferrexpo and Kaz Minerals because we are more cautious on both stocks' prospects than the market consensus.

Our underweight positions in the Utilities, Telecoms and Consumer sectors are based on their negative earnings outlooks and a lack of attractive corporate stories. We undertake regular 'on the ground' research trips so our positioning is kept under constant review and will change if we feel that our sectoral positioning risks us missing out on potentially compelling opportunities.

Notable stock-level detractors included energy name Novatek. We increased our position in this stock as it was rebalanced in the benchmark index. Unfortunately, however, our timing meant that we did not manage to benefit fully from the stock's price swing upwards, so we lost some relative performance to the index.

Earlier, we commented that we were intent on reducing our exposure to smaller, less liquid stocks. This is very much a work in progress, and we continue to see some of our existing holdings across a range of sectors underperforming the market and dragging down returns. Examples include several stocks that are not in the Company's benchmark index, such as automobile company Sollers, road freight transport business Globaltruck Management, health care provider MDMG, footwear manufacturer Obuv Rossii and real estate developer Etalon Group. Although these holdings do not present us with operational risks, we have been endeavouring to reduce our positions whenever there has been sufficient liquidity in the market for us to do so.

Amongst the more notable stock level contributors was our decision to reduce our exposure to local oil player Tatneft. In last year's annual report, we reported that we had taken advantage of the stock's share price strength to take some profits from our holding. This year we continued to reduce our exposure further and our timing was beneficial, prior to the index rebalancing, after which the stock's share price came under pressure.

Once Russia's largest food retailer and one of the market's most favoured stocks, Magnit is an out-of-favour business that we don't hold, a decision vindicated by its poor market performance this year. The company endured a difficult time following a change of ownership, management and strategy. Its turnaround plan to regain market dominance failed to impress investors and we expect its recovery to be difficult and prolonged.

Longstanding shareholders will know that Sberbank has long been one of our favoured investments - it was our very largest holding just two years ago - but it underperformed the market this year. We continue to be impressed by the bank's dynamism and innovation, but it is an example of a domestically-focused stock that we do not favour at present. We had already begun trimming our holding during an earlier period of share price strength, a decision that benefitted relative performance.

Investments in former Soviet Union Republics: up to 10% of the Company's gross assets can be invested in companies operating out of former Soviet Union Republics although our only holding that falls into this category currently is Belarus-based, global software engineering and IT consulting player EPAM (approximately 1.2% of portfolio assets); this follows our exit from Georgia's TBC Bank and Kazakhstan's Nostrum over the course of the year.

Prior to our exit, Georgian lender TBC Bank had detracted from performance. The company had been under considerable regulatory pressure relating to investigations into an historical business case as well as governance concerns over its board composition. Investigations by the National Bank of Georgia and the Office of the Public Prosecutor resulted in a board reshuffle, aiming to deliver an enhanced governance structure and ensure future stability. However, the removal of senior board members altered the bank's entrepreneurial style which, when combined with the economic slowdown (and slowing loan growth) in Georgia, increased the stock's risk profile and made it less appealing for the portfolio.

Our decision to sell out of Kazakhstan's Nostrum Oil & Gas towards the end of 2018 was prompted by both operational and governance factors. Whilst several of the company's wells were presenting geological challenges it was high profile legal issues relating to Nostrum's largest investor that materially changed our investment outlook.

Outlook

Our investment approach, with its focus on identifying long-term growth opportunities from individual stocks, has delivered robust returns to shareholders over recent reporting periods, even though the underlying economic and geographic fundamentals have been challenging. The risks of slowing global growth, trade tensions and a stubbornly strong US dollar are lingering concerns, but central banks may be able to offset these risks with further interest rate cuts, which have gathered pace in Russia and around the world in 2019.

Looking ahead, our views have not changed materially since we wrote to shareholders in June. We continue to believe that the market in Russia provides a good long-term investment opportunity, particularly if sentiment towards Russia becomes more positive. We expect to see:

•      Firmer oil prices in 2020, driven by production cuts and politics, which will be positive for the earnings of Russian companies.

•      The Central Bank of Russia reducing its key interest rate (currently 6.5%) by a further 1 to 1.5% over the next 18 months in order to stimulate spending and investment. This would buoy the market and, notwithstanding unforeseen political/economic concerns, the Central Bank is targeting a 2.5-3% gap with the US Fed's key interest rate. The rouble is likely to appreciate moderately in such an environment but not to the extent that it would impact exporters.

•      Deflationary pressures remaining in 2020, following the fall in Russian inflation in 2019. However, we also expect to see some green shoots of economic growth appear on the back of the Central Banks's monetary policy.

 •     After an overall positive 2019, starting from a higher base in 2020 will make earnings growth more challenging. It is feasible that the majority of returns will be driven by dividends which provides valuation support and, in this world of low interest rates, this is something we expect markets will appreciate over the coming year.

 •     The environment around sanctions remaining fluid, and we will continue to monitor the situation. Economic links with the European Union will be pivotal to resolving the Russia-Ukraine stalemate and a 'Minsk treaty' now looks a realistic prospect, as Ukraine's recently elected president has started to support the idea. Alongside this, EU links with Russia are improving: France is pushing fellow EU members to rebuild economic relationships with Russia while German companies have started to attend economic forums in Russia, after a five-year absence.

We believe the fundamentals for investing in Russia remain attractive for those investors prepared to take the risk. Our portfolio is underpinned by several 'dividend hero' stocks whose dividend track records are expected to remain strong. With local Russian investors becoming bigger participants in the equity market, we expect the hunt for income sourced from dividends to become more prevalent. As part of our selection criteria, we will continue endeavouring to add value for shareholders by basing investment decisions on relatively strong and improving fundamentals, which we believe will reassert themselves as the primary drivers of returns over time.

Oleg I. Biryulyov

Habib Saikaly

Investment Managers

20th January 2020

Principal Risks

The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The risks identified and the ways in which they are managed or mitigated are summarised as follows:

With the assistance of the Manager, the Board has drawn up a risk matrix, which identifies the key risks to the Company and the Company's actions to manage the risks.

In the year under review the Board monitored the risks arising which included continuing sanctions against Russia which have impacted market sentiment.

These key risks fall broadly under the following categories:

•   Investing in Russia

Investors should note that there are significant risks inherent in investing in Russian securities not typically associated with investing in securities of companies in more developed countries. In terms of gauging the economic and political risk of investing in Russia, it frequently appears in the higher risk categories when compared with most Western countries. The value of Russian securities, and therefore the net asset value of the Company, may be affected by uncertainties such as economic, political or diplomatic developments, social and religious instability, taxation and interest rates, currency repatriation restrictions, crime and corruption and developments in the law or regulations in Russia and, in particular, the risks of expropriation, nationalisation and confiscation of assets and changes in legislation relating to the level of foreign ownership.

The Board, with the assistance of the Manager, monitors the Company's activities to ensure that they remain compliant with the current sanctions regime including the specific requirements applicable to the Manager as a company subject to the laws of the United States of America and other jurisdictions that it operates in. The Board acknowledges the negative impact of sanctions on the wider market although the current sanctions regime has not prevented the Company from operating within its investment guidelines.

•   Share Price Discount to Net Asset Value ('NAV') per Share

If the share price of an investment trust is lower than the NAV per share, the shares are said to be trading at a discount. The widening of the discount can be seen as a disadvantage of investment trusts which could discourage investors. Although it is common for an investment trust's shares to trade at a discount, particular events can negatively impact market sentiment. The Board monitors the Company's discount level and seeks, where deemed prudent, to address imbalances in the supply and demand of the Company's shares through a programme of share buybacks.

For details of the Company's Continuation Vote and Tender and Discount Control arrangements, see Key Features at the front of this document.

•   Investment Underperformance and Strategy

An inappropriate investment strategy, for example asset allocation or the level of gearing, may lead to underperformance against the Company's benchmark index and peer companies. The Board manages these risks by diversification of investments through its investment restrictions and guidelines, which are monitored and reported on by the Manager. The Manager 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 managers, who attend all Board meetings, and reviews data which show statistical measures of the Company's risk profile.

Possible actions that the Board may consider to address underperformance include changing the portfolio manager or selecting another manager.

•   Failure of Investment Process

A failure of process could lead to losses. The Manager mitigates this risk through internal controls and monitoring. Fraud requires immediate notification to the Board and regular reports are provided on control processes.

•   Loss of Investment Team or Investment Manager

The sudden departure of the investment manager or several members of the wider 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.

•   Operational and Cyber Crime

Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the Depositary or custodian's records could prevent accurate reporting and monitoring of the Company's financial position. Under the terms of its agreement, the Depositary has strict liability for the loss or misappropriation of assets held in custody. See note 20(c) of the Company's Annual Report and Financial Statements for further details on the responsibilities of the Depositary. Details of how the Board monitors the services provided by JPMF 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 on page 29   of the Company's Annual Report and Financial Statements. The threat of Cyber attack is increasing and regarded as having the ability to cause equivalent disruption to the Company's business as more traditional business continuity and security threats. The Company benefits from JPMorgan's Cyber Security Programme. The information technology controls around the physical security of JPMorgan's data centres, security of its networks and security of its trading applications are tested by independent auditors PricewaterhouseCoopers and reported every six months against the AAF standard.

•   Board Relationship with Shareholders

The risk that the Company's strategy and performance does not align with shareholders expectations is addressed by the Manager and includes the organisation of a programme of visits to major shareholders, and the provision of an extensive range of investor information including nationwide presentations by sales teams. Feedback from shareholders is received directly and via brokers which is fed back to the Board regularly.

•   Political and Economic

Changes in financial or tax legislation, including in the European Union, may adversely affect the Company. The Manager makes recommendations to the Board on accounting, dividend and tax policies and the Board 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. A widening of the capital controls by the Russian Government could negatively impact the Company. The introduction of limitations on the ability of Russian companies to distribute dividends to foreign companies could materially reduce the Company's revenue and amount available for distribution to shareholders.

•   Regulatory and Legal

Breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties, or a qualified audit report. Loss of investment trust status could lead to the Company being subject to tax on capital gains. The Directors seek to comply with all relevant regulation and legislation and rely on the services of its Company Secretary, the Manager, and its professional advisors to monitor compliance with all relevant requirements.

•   Market and Financial

The Company's assets consist of listed securities and it is therefore exposed to movements in the prices of individual securities and the market generally. The Board considers asset allocation and stock selection on a regular basis and has set investment restrictions and guidelines, which are monitored and reported on by the Manager. The financial risks faced by the Company include market price risk, interest rate risk, foreign currency risk, liquidity risk and credit risk. Further details are disclosed in note 20 on pages 60 to 64 of the Company's Annual Report and Financial Statements. The Manager regularly monitors the liquidity of the portfolio including determining the market valuation of securities held, the average daily volume and number of days to liquidate a holding. As can be seen in Note 19 on page l of the Company's Annual Report and Financial Statements, all the Company's assets are categorised as Level 1 as they have quoted prices in an active market.

Transactions with the Manager and related parties

Details of the management contract are set out in the Directors' Report on page 25 of the Company's Annual Report and Financial Statements. The management fee payable to the Manager for the year was £3,288,000 (2018: £3,102,000) of which £nil (2018: £nil) was outstanding at the year end.

During the year £25,000 (2018: £25,000), including VAT, was payable to the Manager for the administration of savings scheme products, of which £nil (2018: £8,000) was outstanding at the year end.

Included in note 6 on page 53 of the Company's Annual Report and Financial Statements are safe custody fees amounting to £134,000 (2018: £150,000) payable to JPMorgan Chase Bank N.A. during the year of which £23,000 (2018: £24,000) was outstanding at the year end.

The Manager may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm's length. The commission payable to JPMorgan Securities Limited for the year was £18,000 (2018: £32,000) of which £nil (2018: £nil) was outstanding at the year end.

The Company was also holding cash in the JPMorgan US Dollar Liquidity Fund, which is managed by JPMF. At the year end this was valued at  £nil (2018: £332,000). Interest amounting to £88,000 (2018: £33,000) was receivable during the year of which £nil (2018: £nil) was outstanding at the year end.

Handling charges on dealing transactions amounting to £189,000 (2018: £199,000) see note 3 on page 52 of the Company's Annual Report and Financial Statements were payable to JPMorgan Chase Bank N.A. during the year of which £12,000 (2018: £1,000) was outstanding at the year end.

Dividend Charges of £368,000 (2018: £410,000) identified in Note 6 of the Company's Annual Report and Financial Statements.  Other administrative expenses include £10,000 (2018: £4,000) of costs charged by the JPMorgan Chase Bank N.A. for American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs). JPMorgan Chase Bank N.A. cost is 'passed through' with no additional margin added.

At the year end, total cash of £2,060,000 (2018: £2,665,000) was held with JPMorgan Chase Bank, N.A.. A net amount of interest of £6,000 (2018: £4,000) was receivable by the Company during the year from JPMorgan Chase.

Full details of Directors' remuneration and shareholdings can be found on page 35 and in note 6 on page 53 of the Company's Annual Report and Financial Statements.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the annual report and financial statements, and the Directors' Remuneration Report in accordance with applicable law and regulations.

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 United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law) and Financial Reporting Standard (FRS) 102. Under company law the Directors must not approve the financial statements unless they are satisfied that, taken as a whole, the annual report and financial statements provide the information necessary for shareholders to assess the Company's performance, business model and strategy and that they give a true and fair view of the state of affairs of the Company and of the total return or loss of the Company for that period. In addition, to provide these confirmations, and in preparing these financial statements, the Directors must be satisfied that, taken as a whole, the annual report and financial statements are fair, balanced and understandable. In order to provide these confirmations and in preparing these annual statements the Directors are required to:

•   select suitable accounting policies and then apply them consistently;

•   make judgements and accounting estimates that are reasonable and prudent;

•   state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

•   prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business

and the Directors confirm they have done so.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors' Report, Directors' Remuneration Report and Statement of Corporate Governance that comply with that law and those regulations.

Each of the Directors, whose names and functions are listed in the Directors' Report, confirms that, to the best of their knowledge:

•   select suitable accounting policies and then apply them consistently;

•   the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards) and applicable law, give a true and fair view of the assets, liabilities, financial position and return or loss of the Company; and

•   The Directors confirm that, 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 strategy and business model of the Company.

•   That the Strategic Report and 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 the Company faces.

The Board confirms it is satisfied that the annual report and financial statements taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the performance, business model and strategy of the Company.

The report and financial statements are published on the www.jpmrussian.co.uk website which is maintained by the Company's Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the Auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the Auditors accept no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. The financial statements are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.

For and on behalf of the Board

Gill Nott

Chairman

20th January 2020

statement of comprehensive income

for the year ended 31st October 2019

	2019			2018
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value   through profit or loss	-	72,431	72,431	-	19,505	19,505
Net foreign currency (losses)/gains	-	(621)	(621)	-	111	111
Income from investments	24,931	-	24,931	19,170	-	19,170
Interest receivable	94	-	94	37	-	37
Gross return	25,025	71,810	96,835	19,207	19,616	38,823
Management fee	(1,315)	(1,973)	(3,288)	(620)	(2,482)	(3,102)
Other administrative expenses	(978)	-	(978)	(1,012)	-	(1,012)
Net return before taxation	22,732	69,837	92,569	17,575	17,134	34,709
Taxation	(3,593)	678	(2,915)	(2,498)	-	(2,498)
Net return after taxation	19,139	70,515	89,654	15,077	17,134	32,211
Return per share	40.04p	147.53p	187.57p	29.58p	33.62p	63.20p

statement of changes in equity

for the year ended 31st October 2019

	Called up	Capital
	share	redemption	Other	Capital	Revenue
	capital	reserve	Reserve1	Reserves1	Reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2017	523	78	46,838	245,854	7,068	300,361
Repurchase and cancellation of the   Company's own shares	(32)	32	(16,400)	-	-	(16,400)
Net return	-	-	-	17,134	15,077	32,211
Dividends paid in the year	-	-	-	-	(12,983)	(12,983)
At 31st October 2018	491	110	30,438	262,988	9,162	303,189
Repurchase and cancellation of the   Company's own shares	(29)	29	(17,910)	-	-	(17,910)
Net return	-	-	-	70,515	19,139	89,654
Dividends paid in the year	-	-	-	-	(14,593)	(14,593)
At 31st October 2019	462	139	12,528	333,503	13,708	360,340

¹ Other reserve, revenue reserve and the capital reserves form the distributable reserves of the Company and may be used to fund distributions to investors. See note 14 on page 58 of the Company's Annual Report and Financial Statements for details.

statement of financial position

at 31st October 2019

	2019	2018
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	357,455	299,101
Current assets
Debtors	1,500	1,221
Cash and cash equivalents	2,060	2,997
	3,560	4,218
Current liabilities
Creditors: amounts falling due within one year	(674)	(130)
Derivative financial liabilities	(1)	-
Net current assets	2,885	4,088
Total assets less current liabilities	360,340	303,189
Net assets	360,340	303,189
Capital and reserves
Called up share capital	462	491
Capital redemption reserve	139	110
Other reserve	12,528	30,438
Capital reserves	333,503	262,988
Revenue reserve	13,708	9,162
Total shareholders' funds	360,340	303,189
Net asset value per share	780.8p	617.6p

statement of cash flows

for the year ended 31st October 2019

	2019	2018
	£'000	£'000
Net cash outflow from operations before dividends and interest	(4,886)	(3,937)
Dividends received	21,693	16,228
Interest received	94	37
Overseas tax paid	-	(6)
Net cash inflow from operating activities	16,901	12,322
Purchases of investments	(71,421)	(86,415)
Sales of investments	85,541	105,236
Settlement of forward currency contracts	(10)	(60)
Net cash inflow from investing activities	14,110	18,761
Repurchase and cancellation of the Company's own shares	(17,354)	(16,402)
Dividends paid	(14,593)	(12,972)
Net cash outflow from financing activities	(31,947)	(29,374)
(Decrease)/increase in cash and cash equivalents	(936)	1,709
Cash and cash equivalents at start of year	2,997	1,281
Exchange movements	(1)	7
Cash and cash equivalents at end of year	2,060	2,997
(Decrease)/increase in cash and cash equivalents	(936)	1,709
Cash and cash equivalents consist of:
Cash and short term deposits	2,060	2,665
Cash held in JPMorgan US Dollar Liquidity Fund	-	332
Total	2,060	2,997

Notes to the financial statements

for the year ended 31st October 2019

1.     Accounting policies

Basis of accounting

The financial statements are prepared under the historical cost convention, modified to include fixed asset investments at fair value, and in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including 'the Financial Reporting Standard applicable in the UK and Republic of Ireland' ('FRS 102') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies.

The revised SORP issued in October 2019 is applicable for accounting periods beginning on or after 1st January 2019. The Company has chosen not to early adopt the revised SORP.

All of the Company's operations are of a continuing nature.

The financial statements have been prepared on a going concern basis. The disclosures on going concern on page 25 of the Directors' Report in the Company's Annual Report and Financial Statements form part of these financial statements.

The policies applied in these financial statements are consistent with those applied in the preceding year.

2.     Return per share

		2019	2018
		£'000	£'000
	Revenue return	19,139	15,077
	Capital return	70,515	17,134
	Total return	89,654	32,211
	Weighted average number of shares in issue during the year	47,795,970	50,961,280
	Revenue return per share	40.04p	29.58p
	Capital return per share	147.53p	33.62p
	Total return per share	187.57p	63.20p

3.     Dividends

(a)   Dividends paid and proposed

		2019	2018
		£'000	£'000
	Dividends paid
	2018 final dividend of 6.0p (2017: 6.0p)	2,905	3,119
	2019 interim dividend of 25.0p (2018: 20.0p)	11,688	9,864
		14,593	12,983
	Dividend proposed
	2019 final dividend of 10.0p (2018: 6.0p)	4,615	2,946

The dividend proposed in respect of the year ended 31st October 2018 amounted to £2,946,000. However the amount paid amounted to £2,905,000 due to shares repurchased after the balance sheet date but prior to the share register record date.

The dividend proposed in respect of the year ended 31st October 2019 is subject to shareholder approval at the forthcoming Annual General Meeting. In accordance with the accounting policy of the Company, this dividend will be reflected in the financial statements for the year ending 31st October 2020.

(b)  Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ('Section 1158')

The requirements of Section 1158 are considered on the basis of the dividend proposed in respect of the financial year, shown below. The revenue available for distribution by way of dividend is £19,139,000 (2018: £15,077,000).

		2019	2018
		£'000	£'000
	2019 interim dividend of 25.0p (2018: 20.0p)	11,688	9,864
	2019 final dividend of 10.0p (2018: 6.0p)	4,615	2,946
	Total dividends for Section 1158 purposes	16,303	12,810

All dividends paid and proposed in the period are funded from the revenue reserve.

The revenue reserve after payment of the final dividend will amount to £9,093,000 (2018: £6,216,000).

4.     Net asset value per share

		2019	2018
	Net assets (£'000)	360,340	303,189
	Number of shares in issue	46,147,780	49,093,384
	Net asset value per share	780.8p	617.6p

5.     Status of announcement

2018 Financial Information

The figures and financial information for 2018 are extracted from the Annual Report and Accounts for the year ended 31st October 2018 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.

2019 Financial Information

The figures and financial information for 2019 are extracted from the Annual Report and Accounts for the year ended 31st October 2019 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.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

For further information please contact:

Paul Winship

For and on behalf of

JPMorgan Funds Limited, Secretary - 020 7742 4000

20^th January 2020

ENDS

Annual Report and Financial Statements

The Annual Report and Financial Statements will be posted to shareholders on or around 27 January 2020 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, 60 Victoria Embankment  London EC4Y 0JP.

A copy of the annual report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM

The annual report is also available on the Company's website at www.jpmrussian.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

 

END

 

 

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