Final Results
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 2021
HIGHLIGHTS
- Total return to shareholders +65.8%
- Return on net assets +61.0%
- Ordinary dividend 35.0p (2020: 35.0p)
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Legal Entity Identifier: |
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549300II3MHI98ZLVH37 Information disclosed in accordance with DTR 4.1. |
CHAIRMAN'S STATEMENT
Performance
The Russian equity market has performed exceptionally strongly during the financial year under review, significantly outperforming both emerging markets and developed ones. The market rose by 70.3% total return as measured by the Company's benchmark, at a time when the FTSE 100 remained almost flat. The Company's return on a net assets basis was + 61.0%, and + 65.8%, on a return to shareholder basis, underperforming the benchmark by 9.3% and 4.5% respectively. Although this was disappointing, one of the reasons was the 'recovery rally' which surprised many investors, and should not detract from the exceptionally high absolute returns that the Company achieved. More detailed information is provided below. The performance over the last five years has marginally beaten the benchmark with a total NAV return of +115.3% compared to a benchmark return of +114.6%. Therefore, the condition that there should be a tender offer for 20% of the shares in the event of the failure to meet the benchmark return will not apply, and no tender will take place in 2022.
The longer term performance of the Company has been good and the Company has outperformed the RTS index delivering a creditable annualised average return of +9% p.a. in NAV terms over 10 years, compared to a benchmark return of +8.4% p.a. on the same basis. The Russian economy is dominated by energy and financial stocks, which were hit heavily at the start of the pandemic but have rebounded recently as global economic activity picked up. A combination of factors has led to a very rapid rise in energy prices which has benefitted the Russian economy and stock market. Unless the current Covid-19 variant causes a further setback to global economies, the strength of the Russian energy stocks looks set to continue. Pleasingly, the level of the Company's discount was relatively stable over the year averaging 11.1%, and only moving out substantially at the peak of the pandemic - see further details in the Discount Control section below.
Overview
The Russian economy has recovered well from the lows of the 2020 recession caused by the start of the Covid-19 pandemic. Although the level of vaccination in Russia was relatively slow to start with, largely due to vaccination reticence , it is picking up now and the economy has largely remained open. The rise in oil and gas prices has enabled the Government to extend considerable support to the domestic economy, both through public sector investment in medical services, infrastructure and defence projects as well as by direct payments to households in the form of increased pensions and one-off payments. The economy is growing currently at around 4% p.a. with industrial production growing at around 7% p.a.
During the year the Investment Manager sought to reposition the portfolio to take advantage of the recovery, the most significant changes being a greater tilt towards energy stocks that are benefitting so strongly from increased global growth. This has provided a positive contribution to the Company's performance. However, a significant detractor and the cause for the underperformance against the index was the stock selection in the materials sector, where one or two less liquid stocks we did not hold performed surprisingly well. Another factor was the Company's underweight holdings in financials, partially offset by our investment in a new Kazakhstan based fintech and banking company, Kaspi that came to market as an IPO. We were overweight in information technology stocks and this also detracted from performance as did the selection of stocks in the communications sector.
With the domestic economy set to grow strongly (subject to any setback caused by the Omicron variant of Covid-19), the choice of consumer focused stocks will be important going forward as we expect this sector to deliver more value. This year however, our overweight allocation to this sector and choice of stocks was a detractor.
There were an number of IPOs in the Russian market this year, which is a welcome development. However, the Managers considered them to be generally overvalued and did not participate in most, with the exception of Kaspi referred to above, and Fixed Price. It is very encouraging to see the number of private investors in Russia growing with almost 20% of Russian households having some equity investment. This a major change from few year ago and must be good for market liquidity.
The Russian market remains on a very low price earnings ratio compared to more developed markets 5.1x (RTSI$) vs 20x (MSCI World Index) and offers a very attractive yield 7.2% vs 1.8%. Data based on Bloomberg's consensus.
Sanctions remain a concern for the Company. Whilst the Russian economy has adjusted to them, it is important that the Company complies fully with them and they remain a key risk. JPMorgan Asset Management's compliance and investment functions monitors all investments and regularly assure the Board that processes are in place to ensure that the Company remains compliant with the current sanctions regime. On the broader front 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 30 of the Company's Annual Report and Financial Statements, which now include the risk of global pandemics.
Dividends for 2021
Net revenue for the year, after tax, was £15,030,000 (2020: £15,375,000) and the revenue return per share, calculated on the average number of shares in issue, was 35.53p (2020: 34.01p). The reduction in revenue has arisen largely as a result of the negative impact of the Covid-19 pandemic on dividend receipts. The Company has accumulated considerable revenue reserves for the year ended 31st October 2021, see note 15 on page 73 of the Company's Annual Report and Financial Statements. The Company is also permitted to pay dividends from its distributable capital reserves.
Based upon the revenue generated by the portfolio, an interim dividend of 25.0p per share in respect of the year ended 31st October 2021 was paid on 5th November 2021. The Company receives most of its dividend income well before the end of its financial year ending 31st October, and hence up until now the company has distributed the large majority of its net income as an interim dividend. The Board proposes a final dividend of 10.0p per share in respect of the year ended 31st October 2021 making a total dividend of 35.0p per share for the year (2020: 35.0p per share). The final dividend is proposed to be paid on 11th March 2022 to ordinary shareholders on the register at the close of business on 4th February 2022.
If approved by shareholders, the final dividend will amount to £4,078,000, 10.0p per share (2020: £4,338,000, 10.0p per share).
Revised Dividend Policy for 2022
Looking ahead, the Board has decided to revise the Company's dividend policy. Dividends from Russian companies have been rising in recent years and the Company has increased its dividends accordingly. We also now have more confidence in the likely level of dividends due in the forthcoming year due to Russian company dividend policies and intend from now on to pay quarterly dividends, forecasting them in advance in the Annual Report. If then at the end of the year there is a surplus, it will be distributed as a higher final dividend, or if there is shortfall, we will use reserves to top up the final dividend. The aim is that shareholders can be confident about the level of dividends for the year ahead. This year we expect the dividends to be a total 60.0p giving a quarterly dividend of 15.0p. These are scheduled to be paid in March, June, September and January. The large increase in the total dividend forecast in 2022 compared with 2021 arises from the improved income generation performance of many of the companies in the Company's portfolio.
Continuation Vote and Tender
At the Company's Annual General Meeting (AGM) on 7th March 2017, a resolution was passed requiring the Company to put a continuation vote to shareholders every five years. Therefore, a continuation vote will be put to shareholders as an ordinary resolution at the forthcoming AGM to be held on 4th March 2022. Given the positive performance returns highlighted above, and the ongoing need for experienced active managers to help investors navigate the risks associated with investments in Russia, your Board recommends to shareholders that they vote in favour of the Company continuing as an investment trust for a further five year period.
As detailed in the RNS announcement released by the Company on 24th November 2021, the Company's NAV to 31st October 2021 outperformed the benchmark over a five year period and therefore it will not be necessary for a tender offer to be made, in the event that the continuation vote is passed.
Following consultation with the Company's large shareholders and its advisers, the Board plans to maintain the tender, subject to the passing of a resolution in favour of the Company's continuation as an investment trust at the Company's AGM on 4th March 2022. The terms of the tender will be 'similar to those relating to the previous tender. The Company will also commit to buy back up to 6% of the shares in issue to the extent that the shares are trading at a discount wider than 10%. This represents a change and gives the Board more flexibility in managing the discount at which the Company's shares are traded. Furthermore, the Company must outperform its benchmark on a net asset value cum income basis over the five year period to 31st October 2026. In the event that it does not meet this target, the tender offer will be for 25% (in the previous five year period this was 20%) of the outstanding shares which will be bought back at NAV less costs and less a discount of 2%. For clarity, the Company's benchmark is the RTS index in sterling terms - see the Glossary on page 88 of the Company's Annual Report and Financial Statements for further details. Any tender offer will also be conditional on shareholders approving the continuation vote in 2027. The Board believes this measure is in shareholders' interests as it further incentivises the Manager to focus on long term investment performance.
Environmental, Social and Governance (ESG)
The Board has reviewed the policies and processes undertaken by JPMorgan on ESG matters in relation to the portfolio your Company invests in. JPMorgan has an integrated ESG bottom-up evaluation process which it uses when assessing all investments. Investing in Russia inevitably means that the Company will be invested in energy stocks, as these dominate the Russian market and index. In addition, it holds a significant proportion of materials stocks. Another feature of the Russian stock market is the small number of stocks that are available for the Company to invest in, compared with other regions. Currently there are only 44 stocks in the Company's benchmark, and this characteristic applies equally to other benchmarks that are dedicated to Russia. Some companies in the Company's limited investment universe currently have comparatively poor ESG scores but may have a coherent plan to address their ESG challenges. In such a scenario, companies may be given an 'Improver' status by the Investment Manager, which can, in some circumstances, support their ownership by the Company on both a risk return and ESG dynamic basis. As can be seen in the Carbon footprint table on page 23 of the Company's Annual Report and Financial Statements, the Company's portfolio has a slightly lower carbon footprint than the Benchmark, which reflects the active approach to ESG that the Manager takes in stock selection.
The Manager pays attention to all aspects of ESG and whilst there is understandable focus by investors on environmental matters, governance is equally relevant in Russia. There have been a number of occasions where the lack of suitable governance has influenced investment decisions being taken by the Manager. The Investment Managers regularly engage on ESG issues when they meet with management of existing and prospective investee companies. The Board believes that companies that address ESG issues and adopt sustainable business practices are better placed to generate sustainable strong performance and create enduring value for shareholders. Further details regarding the Company's approach to ESG can found on pages 20 to 23 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 22 of the Company's Annual Report and Financial Statements.
Discount Control
As at 31st October 2021, the discount was 11.3%, almost unchanged from the previous year end date rate of 11.2%. Over the reporting period, the discount averaged 11.1%, and ranged from 15.2% to 7.7%. The relative stability of the discount level has been assisted by the Board's active share buyback programme. From the Company's financial year end to 21st January 2022, the benchmark index fell by 21.9%, the Company's return to shareholders fell by 23.8%, and the discount stood at 12.1%.
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. It has been of considerable value to have this mechanism in place over the year. Whilst there has been relatively thin trading in the Company's shares, the use of the buyback has enabled the expansion of the discount to be managed at times of moderate levels of excess supply of stock.
During the financial year 2,602,736 shares were bought back, approximately 6% of the Company's issued share capital at 31st October 2020. This added 5.6 pence to the Company's NAV return in the financial year. The weighted average discount at which these shares were bought back was 11.6% and these buybacks accounted for approximately 16% of traded market volume during the reporting period. The current policy was initiated in January 2018. The Board will seek authority to renew the Company's share issuance and buyback powers at the forthcoming AGM.
Board of Directors
As announced on 4th October 2021, in accordance with the Board Succession Plan, I will be retiring as Chairman of the Board and Director at the Company's next AGM on 4th March 2022.
I am delighted that following the end of my tenure as a Director of the Company since 2011 and its Chairman since 2015, the Board have unanimously agreed that Eric Sanderson will take over from me as Chairman of the Board immediately following the 2022 AGM. I am confident that his background in financial services and extensive Board experience will be of great value to JPMorgan Russian Securities plc.
The Company engaged an independent search consultancy to search for a suitably qualified Audit Committee Chair to replace Eric Sanderson as the Audit Committee Chairman. After a thorough selection process using the services of an independent third party search agent, the Board are very pleased to announce that Dan Burgess was appointed as a Director on 4th January 2022. Dan Burgess was a long serving and well regarded former KPMG audit partner with experience of living and working in Russia and has a good understanding of investment trust companies,
In compliance with corporate governance best practice, all Directors, except myself, 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 be reappointed. As referred to above, I will not be standing for reappointment.
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 supported by JPMorgan Asset Management's Emerging Markets and Asia Pacific equities team (EMAP), which consists of 100+ investment professionals based in both the UK and overseas. The Company benefits greatly from the extensive experience of the lead investment manager, Oleg, who has over 20 years' experience of investing in Russia and has managed the Company through several previous severe Russian and global market disruptions.
The Board have been pleased that in the autumn the Board and the Manager were again able to meet in person, which after the lengthy time we had spent meeting virtually was very beneficial. That said, we have been delighted in the way that all the teams at JPMorgan have continued to work well and effectively together, albeit on a remote basis. We are also grateful to the JPMorgan compliance team which constantly reviews the Company's compliance with sanctions, and reports regularly to the Board. The focus on ESG was maintained through the investment management embedded ESG evaluation process that scrutinises all investments made by the Company.
As mentioned above, marketing and promotional activity continued with a significant effort being made to reach out to new shareholders. The Board is keen to see the shareholder base of the Company widened and it closely monitors the marketing activities undertaken by JPMorgan on its behalf. This has been challenging this year, as it has obviously not been possible for the sales team to pursue face to face marketing activities. However, the public relations profile has been raised considerably, thanks to the efforts of the Manager working on behalf of all the JP Morgan trusts. We hope that the move to pay quarterly dividends will prove attractive to retail shareholders, thereby helping to diversify the share register.
The performance of the Manager was formally evaluated by the Board. Following this review undertaken in September 2021 by the Management Engagement Committee, the Board concluded that the performance of the Manager had been more than satisfactory and that their services should be retained.
At a time when there is increasing downward pressure on investment management fees, we have responded by requesting that JPMorgan Funds Limited reduce their fee. As detailed in the RNS announcement released on 22nd June 2021, with effect from 1st November 2021 the investment management fee has been reduced from 1.0% per annum to 0.9% of the Company's net assets. This should further assist the downward trend of the Company's Ongoing Charges, which reduced in the year ended 31st October 2021.
Annual General Meeting
Regrettably, Covid-19 restrictions prevented the holding of the Company's AGM in 2021 in the usual format. The Directors were disappointed not to be able to have the usual interaction with shareholders at this forum. It is still unclear what format will be permissible for the forthcoming AGM at 2.30 p.m. on Friday, 4th March 2022, but we are planning for it to be held at 60 Victoria Embankment, London EC4Y 0JP.
We do, of course, strongly advise all shareholders to consider their own personal circumstances before attending the AGM in person. For shareholders wishing to follow the AGM proceedings but choosing not to attend, we will be able to welcome you through conferencing software. Details on how to register, together with access details, will be available on the Company's website: www.jpmrussian.co.uk or by contacting the Company Secretary at invtrusts.cosec@jpmorgan.com
As is normal practice, all voting on the resolutions will be conducted on a poll. Due to technological reasons, shareholders viewing the meeting via conferencing software will not be able to vote on the poll and we, therefore, encourage all shareholders, and particularly those who cannot attend physically, to exercise their votes in advance of the meeting by completing and submitting their form of proxy. Shareholders are encouraged to send any questions ahead of the AGM to the Board via the Company Secretary at the email address above. We will endeavour to answer relevant questions at the meeting or via the website depending on arrangements in place at the time. Your Board encourages all shareholders to support the resolutions proposed.
If there are any changes to the above AGM arrangements, the Company will update shareholders through the Company's website and through an announcement on the London Stock Exchange.
Outlook
The key themes of strong energy price levels and continued political uncertainty are likely to be strongest influencers on the outlook for the Company. Russia, like the rest of the world, faces the challenge of managing the continuing impact of the Covid-19 pandemic. In Russia vaccination rates are around 60% and increasing. Nevertheless, the new variant, Omicron, will present a challenge and it remains to be seen what the impact of this wave of infections will be on the wider Russian economy.
The strength of the market for Russia's key exports of oil and gas are positives for Russian and this gives the Government the flexibility to support the domestic economy. However, as in other major economies, with the prospect of rising inflation lying ahead, the Russian Central Bank has acted quickly with increases to interest rates and further rises are expected.
Increased political tensions around Ukraine also have the potential to derail the more positive economic outlook. The recent deterioration in US and Russia relations has arisen as the new US President seeks to assert his authority and the Russian government is testing the limits of US and European commitment to the region. The latest attempts to reduce tensions have involved negotiations between Biden and Putin, NATO and Russian Officials but so far have failed to result in any significant thawing of relations. The political risk associated with investment in Russia was further highlighted following the unrest in Kazakhstan which threatened to engulf the country in early January 2022, and at the time of writing the outcome remains uncertain.
The Investment Managers' approach has not changed over this period and they continue to seek out value in well run companies with strong income generation. This approach has been proved to be successful over many years and is unlikely to change materially in the foreseeable future. The Russian market will remain volatile subject as it is to political shocks as well as the normal economic ones. However, for those who are prepared to ride out the volatility, as this year's absolute performance shows, the results can be very rewarding.
As I leave the Board, I would like to thank everyone at JPMorgan and my Board colleagues for all their hard work and support. I wish them all well in the future and have confidence that under their guidance the Company will continue to prosper.
Gill Nott
Chairman 24th January 2022
investment managers' report
Introduction
In this report we consider the Company's investment performance for the financial year to 31st October 2021. We discuss the market backdrop, examine the drivers of performance over the year and consider the outlook for 2022.
Economic and political backdrop: Covid-19, lockdowns and hopes for recovery
The Russian economy has rebounded from 2020's pandemic-induced recession, supported by rising oil prices and an increase in oil production agreed by OPEC+. Gas prices also rose strongly, experiencing a threefold increase in Q321, when a drop in supply from Norway and the US coincided with a weather-related rise in demand. There has been a surge in Russian Covid-19 cases since the summer, due in part to widespread vaccine scepticism. However, the economy has remained open and industrial production is currently growing at an annual rate above 7%, thanks in large part to the strength of the construction and metal and mining sectors.
Government spending will also underpin growth. Higher oil and gas prices are boosting the state's fiscal position and the government has used these higher revenue receipts to increase pensions for the first time in six years and to fund a one-off payment to households, in a bid to win support in the forthcoming parliamentary elections. Public investment in medical care and healthcare facilities, transport infrastructure and defence projects has also increased.
After contracting by 3.1% in 2020, the Russian economy is currently growing at an annualised rate of around 4%. And the IMF projects growth of 2.9% in 2022, very close to the 3% target set out in the government's economic recovery plan.
The Russian equity market was boosted from late 2020 onwards by news of the discovery of several viable coronavirus vaccines. As in other major markets, this so-called 'recovery rally' was led by cyclical, economically-sensitive value stocks such as energy companies and financials, that were worst hit by the pandemic, and likely to gain most from the return to more normal levels of economic activity. Expensive growth stocks, such as technology and healthcare companies, that performed strongly at the onset of the pandemic, lagged the broader market. This underperformance of growth stocks was driven by concerns about rising interest rates, which reduce the value of projected earnings and, hence, stock prices. The Russian market is characterised by a large number of value and income stocks, so this so-called 'value rotation' favoured the RTS index, which rose 70.3% over the year to end October 2021, significantly outperforming other emerging markets and those of the advanced economies over the period.
One major and very welcome development within the Russian market is the rising importance of domestic investors. Russian institutional investors such as Sberbank and VTB wealth management are now the largest participants in the Russian market. At the same time, retail investors have increased their involvement, and almost 20% of Russian households now have equity investment accounts. These developments bode very well for the evolution of the market, by broadening the investor base and enhancing market liquidity.
Performance
Against this backdrop, in the financial year to end October 2021, the Company returned 61.0% on a net asset basis and 65.8% in share price terms. We are pleased to have delivered such impressive absolute returns to investors over the past financial year. However, the portfolio underperformed the benchmark RTI Index return of 70.3%. Much of this underperformance occurred during the first quarter of the financial year, when our holdings of quality, income generating stocks with long term growth prospects lagged the performance in cyclical and value stocks during the market rebound inspired by the arrival of effective vaccines.
The quality stocks we favour are mostly found in sectors such as materials, IT, real estate and consumer staples, all of which lagged during the market rebound. This meant that our sector selection detracted from relative performance, as the portfolio was overweight in most of these sectors, with the notable exception of materials, while being underweight in sectors such as energy and financials, which outperformed. Over the course of the financial year, we sought to rebalance the portfolio to improve performance by increasing exposure to the recovery. These changes are discussed in the following section. Stock selection also had a negative impact on relative returns over the financial year as did the absence of gearing, as the portfolio had a small net cash position over the period.
While this near-term relative performance is disappointing, longer term performance relative to the benchmark has been robust. The Company has outperformed the RTS Index over five and ten year periods, delivering an average annualised total return of 9.0% pa in NAV terms over the ten years ended 31st October 2021, compared to benchmark return of 8.4% pa on the same basis.
Stock performance and portfolio positioning
The most significant changes we made during the review period to heighten the portfolio's exposure to the recovery included increasing positions in energy and financial stocks, and reducing our holdings of technology, communications services and consumer stocks.
The portfolio remains overweight energy relative to the benchmark at the end of the financial year, and increasing our energy exposure proved profitable. This sector was the main positive contributor to returns over the period, thanks to our stock selection decisions. Our overweight holding in Gazprom Neft, our underweights in Surgutneftegas, and not holding Transneft added most to performance.
We remain very positive about the energy sector outlook. This confidence is reflected most notably in our overweight to Gazprom, which represented 19.4% of the portfolio at the end of the review period, the portfolio's largest holding, compared to a benchmark weighting of 14.4%. We believe that despite the 155% rise in Gazprom's share price over the financial year, the market does not yet fully reflect the earnings power of this company. We estimate that Gazprom will trade at a price/earnings multiple of 3.5x, and pay a dividend yield of 15% or more during 2022. We expect positive earnings revisions and further share price gains over the next couple of quarters at least, as the market comes to fully appreciate Gazprom's future earnings capacity.
We are also optimistic about oil and gas prices, which we expect will be supported by strong demand as the global economy reopens and air travel increases further. Supply constraints will also underpin prices due to ongoing reductions in capital expenditure in conventional oil and gas production, in favour of renewable energy sources.
At the end of the review period, in addition to Gazprom, there were three other energy companies in the portfolio's top 10 holdings - Lukoil, Rosneft and Novatek - which together comprised 25.4% of portfolio assets. While we like Lukoil as a steady producer, with a clear dividend policy and well-established operations, Rosneft is our preferred name, as we believe the company is in the best operational and financial position to benefit from higher oil prices and stronger demand. In addition, Rosneft's free cashflow will be boosted significantly by tax rebates and subsidies, which take effect as oil prices rise. And the scale of its Vostok Oil project is not yet fully appreciated by the market. This project will add 1% to global oil production and 10% to Russian output, and increase Russia's GDP by an estimated 0.5% when it becomes operational in 2024. We increased our position in Rosneft during the year.
We also have a large and longstanding position in Novatek, another energy producer with a great growth story, and a management team with a proven ability to deliver complex projects on time and on budget. Novatek also provides the portfolio with exposure to the transition to LNG, as it is expanding its LNG production.
Still within the energy sector, our underweight to Surgutneftgas and our decision not to hold Transneft are motivated by questions about governance issues, as both companies have unusual shareholder structures, limited disclosures on capital allocation and large variations in profitability. In the case of Tatneft, we were disappointed by the company's dividend policy and capital allocation decisions in 1H 2021 and so trimmed back our holding. However, we have returned back to the name more recently, due to the rise in oil prices.
Our underweight to utilities made the second largest positive contribution to returns with the exception of our investment in RusHydro. We have avoided this sector due to the complexity of the regulation. The portfolio's out-of-index exposure to healthcare made a modest contribution to returns. Within this sector, we are very pleased with the performance of MD Medical Group, which provides healthcare services for women and children in Russia. This company has been a prime beneficiary of higher consumer spending on medical services. We prefer it to the recently listed European Medical Centre (EMC), which we do not hold, as it is more dependent on government orders and is less diversified, although we are pleased to see the arrival of new participants in the healthcare sector.
The main detractor from performance at the sector level over the financial year was our exposure to materials. While our underweight to this sector assisted performance at the sectoral level, stock selection detracted. We underestimated the potential gains of low liquidity stocks such as Alrosa, a diamond mining company and high-end jeweller, Phosagro, an agricultural chemicals producer and Rusal, an aluminium producer. We had no exposure to these stocks, but all of them more than doubled in value over the year. We avoided Alrosa, which we see as a play on luxury consumption, on the view that the collapse of global travel and inflationary pressures would diminish demand for their products. We tried to build up a position in Phosagro, but the illiquidity of the stock made this very difficult. Furthermore, a change in export regulations and a price cap on domestic sales have cast a cloud over the company's earnings outlook, so we have opted to avoid it for now. The justification for the underweight position in Rusal included the change in dividend policy as referred to below.
Staying within the materials sector, our overweight to Norilsk Nickel (currently the portfolio's sixth largest holding at the end of the review period) also hurt returns. This company produces nickel, copper and rare metals, which are in high demand from electric vehicle and battery manufacturers, and our holding provides the portfolio with useful exposure to these rapidly growing industries. We expected a relief rally after the company settled a fine imposed for a 2020 oil spill, but another accident at its Polar Division halted production for several months and put the share price under renewed pressure. Investors were also unhappy about a change in Norilsk's dividend policy, which will now offer shareholders the opportunity to receive some cash via share buybacks, rather than dividend payments. (The change in Norilsk's dividend policy also created a risk for Rusal, which depends on Norilsk's dividends for its own cash flow and debt repayments.) We are disappointed by Norilsk's two recent breaches of environmental and safety standards, however we continue to hold the stock as we believe that the company made significant changes in personnel and allocated additional budget for investments to control Environmental risks going forward, so we consider it as a ESG 'Improver' now. Our longstanding, overweight positions in steelmakers Severstal and Novolipetsk Steel (NLMK) (both top 10 holdings) detracted from performance during the year due to pullbacks in their share prices after strong gains. However, we have retained both positions, as we like their capital allocation practices and very high income generation.
Financials were the second largest detractor from performance over the period. Although we eliminated our underweight position in financials over the course of the year, with hindsight, we should have closed the underweight entirely, as sector allocation still detracted from returns, as did stock selection. Avoiding TCS Group, an online retail banking and financial services provider, proved especially costly to relative performance. We had concerns over governance issues and the potential reactions of government regulators. The share price rally in the first half of the financial year made TCS Group look very expensive - we believed such a high price/book multiple could not be justified for a company such as TCS, which has exposure to subprime and unsecured loans. Our small underweight to Sberbank also hurt relative performance. This bank is a solid performer and a 'go to' stock for investors seeking exposure to Russia, and our second largest position. However, due to concentration risk and our preference for exporters, we had a slight underweight in Sberbank in the period under review.
The adverse performance of these financial holdings was partially offset by significant positive contributions from our acquisitions of two out-of-index Kazakh banks during the review period. We participated in the initial public offering (IPO) of Kaspi, a profitable bank and fintech company, with a very reasonable valuation and a source of the market's highest dividends. This is strategic holding, which we expect to maintain for some time. The second Kazakh acquisition was Halyk Savings Bank, which is perceived as the 'Sberbank of Kazakhstan', i.e. a proxy for exposure to Kazakhstan, which will benefit from the country's exposure to high oil prices. As with Kaspi, Halyk's valuation is reasonable and it offered a dividend yield of 15% in 2021 - probably the highest bank dividend yield available anywhere in the world.
Still within financials, we acquired an exposure to Moscow Stock Exchange (MOEX) during H121, which detracted from returns over the period. We subsequently took profits, closing the position on valuation grounds and due to rising competition from the newly listed St Petersburg Exchange.
While we reduced our overweight to information technology over the year, exposure to this sector was still negative for relative performance, as the performance of tech stocks lagged the index. Our exposure to QIWI, an online payments and credit company, which was hurt by regulatory changes, also detracted, as these changes resulted in the loss of a major part of its business and it incurred hefty associated fines. We closed the position in September as there is little prospect of the company recovering from this blow in the foreseeable future. This loss on QIWI was partially offset by the favourable impact of our longstanding position in EPAM, a digital platform and software developer, which is one of the portfolio's top 10 holdings. This company has an exceptional record of growth and strong returns, and it made one of the largest contributions to returns in the past year, as the share price doubled. However, we are becoming concerned about the stock's valuation which now has a P/E of more than 70x, and we have begun trimming the position.
The portfolio's exposure to communication services detracted modestly from relative performance. Over the course of the year, the portfolio's exposure was shifted from a notable overweight of around four percentage points, to an equally sizable underweight, and this move contributed to returns. However, the positive impact of this shift was more than countered by the detrimental impact of stock selection decisions, particularly our overweight in Rostelecom. We prefer this company to mobile players, as we see potential for it to monetise its broadband network in the regions. Rostelecom also has a monopoly on the provision of cloud data services for the Russian government and State controlled businesses, a fact which is not fully reflected in the share price. The portfolio's overweight in Sistema had a small adverse impact on returns. Sistema is a holding company which we favour because it provides exposure to several mobile telecommunications services subsidiaries, including Mobile TeleSystems, at a discount. We continue to hold both Rostelecom and Sistema.
Gains in several other holdings within this sector partially offset losses on these two positions. For example, our position in Yandex, an internet content and information platform which is Russia's equivalent to Google, performed very well. We took some profits, reducing our exposure significantly in Q1 2021, although the stock remains among the portfolio's top 10 holdings. A change of CFO has resulted in an increase in spending on 'blue sky' projects. While such projects are exciting and bode well for the company's longer term future, the associated capital spending has taken a toll on current profitability. Our position in Mail.Ru, Russia's largest Russian language internet and social networking company, also added to returns. However, we have closed the position, as we have been disappointed in the company's efforts to monetise its social network and gaming offerings. We also have concerns about governance and regulatory risks, as control of the company has recently changed (along with its name, which became VK in October 2021), and the government is demanding more control over social media.
The portfolio's overweight to consumer staples detracted from returns due to both asset allocation and stock selection decisions. Our longstanding position is grocery retailer X5, which is a leader in the sector, had the largest negative impact. We held an overweight to this stock versus an underweight to its rival Magnit. However, X5's share price has been subject to some pressure as the rise of the e-grocery industry has threatened its market dominance, especially in Moscow and St Petersburg. At one point during the year, we exited our position in Magnit, as we did not like the company's deal to acquire DIXY, Russia's third largest food retailer after X5 and Magnit, and we expect the company to face ongoing operational challenges. However, we did not want to be underweight this sector, as in our view, food retailing in Russia is becoming a value rather than a growth sector and we expect strong cash generation and higher than market dividends from this sector, so we re-opened the position in Magnit in Q321.
We were also overweight in consumer discretionary and this detracted modestly from performance over the year due mainly to stock selection decisions. Our overweights in Detsky Mir and Fixed Price Group, both had small adverse impacts on returns. Detsky Mir is a leader in the department stores and digital retail sector. It is cash rich, capable of internally funding expansion and it pays an attractive dividend. In addition, the market is overlooking the potential upside in its online pet supplies business Zoozavr, which we expect to increase to more than 30% of Detsky Mir's market cap within a couple of years. We purchased department store operator Fixed Price during its IPO, at what we believed it to be a fair price, but the shares de-rated after floating as the IPO valuation was elevated and market made some adjustments later to more realistic multiples. However, we continue to hold the stock, as we are attracted to its strong cash generation and growth prospects, and we expect the price to recover with time.
Within real estate, we sold two long term holdings in residential real estate developers, Etalon and LSR, eliminating our exposure to this sector, after both holdings undermined performance over the past year. New regulations have taken a greater than expected toll on the residential construction sector, destabilising these businesses and increasing earnings volatility. In addition, the introduction of special escrow accounts to protect home buyers has made the sector much more capital intensive.
The sale of these two mid-cap companies is consistent with our previously discussed plan to reduce the overall risk level of the portfolio by cutting our exposure to smaller, less liquid stocks, as they tend to underperform in rising markets. We sold Ros Agro for similar reasons. This company is an agricultural producer which has experienced wide swings in its fortunes due to fluctuations in the prices of soft commodities including wheat, sugar and meat. Such price volatility raises the risk of state regulation of prices, which has undermined our conviction in the stock. We also disposed of Global Truck, a small-cap transport and logistics company, as we have concerns about the company's ability to withstand cost pressures and expand its business.
The Russian market saw several high profile IPOs during the year, which we welcome for the same reason that we are pleased to see greater participation from Russian domestic investors - new arrivals, like new investors, help to deepen and diversify the market. However, in several instances, we did not participate in the listings, due to what we viewed as excessive valuations. IPOs in this category included Renaissance Insurance Group, Segezha, a forestry and packaging company and OZON, an e-commerce company, where we are particularly cautious, on the basis that competition in e-commerce is intense and the sector requires heavy capital expenditure to generate meaningful returns.
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 quality companies that demonstrate the best long term growth or value opportunities. We favour market leaders, which we believe can generate a return on invested capital (ROIC) well above their cost of equity (COE) by expanding their businesses nationally and internationally.
To do this, we actively manage the portfolio and continue to build our internal research capabilities, thanks to a growing team of analysts with deep expertise in this complex market. We base our decisions on a proven investment process that analyses the specific fundamental characteristics of stocks. We believe that an active approach makes sense when investing in Russia, given the market concentration, the prevalence of corporate governance issues and political risk.
Integrating ESG into the investment process
JPMorgan Asset Management (JPMAM) believes Environmental, Social and Governance (ESG) issues are an essential component of successful long term investment management. The company adopts an integrated approach to ESG issues, ensuring they are taken into account when building their portfolios and actively engaging with investee companies on these issues throughout the holding period. JPMAM seeks companies that run their businesses in a sustainable way, treat minority shareholders and other stakeholders fairly and engage in practices likely to enhance the company's reputation, not compromise it.
We share JPMAM's belief that 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, governance considerations are integrated into our investment process. However, environmental and social concerns are an ever-increasing part of the investment landscape, partly due to the impact they can have on investment returns and cash flows, so, where relevant, we assess environmental and social issues and include them in our decision-making process.
We use an active bottom-up process, with emphasis on direct contact with companies. ESG factors are systematically and explicitly considered through a Risk Profile analysis of a company's fundamentals, the sustainability of its business model and its governance practices. This ensures there is due focus on potential risks. Three quarters of the issues addressed in the analysis relate to specific governance and other ESG matters, including shareholder returns, management strength and the company's track record in environmental and social issues. Through this process, we seek to understand the company-specific and external factors which could negatively impact a company, and identify issues that we wish to address in our future engagements with the management of investee companies. Companies with ESG scores that have increased over reporting periods are identified in the process and considered as 'Improvers'.
We have recently enhanced this Risk Profile process, and a strategic classification of Premium, Quality or Trading is now assigned to portfolio companies. This classification is a means of assessing a company's potential for long-term value creation, via reference to the number of issues or 'red flags' identified through the Risk Profile analysis.
While acknowledging that a significant proportion 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 governance practices. We also aim to influence their behaviour and encourage best practice through dialogue. We are always focused on the efficient use of capital, although we have engaged broadly on multiple topics that affect valuation and propriety. See the ESG section of this report on page 20 of the Company's Annual Report and Financial Statements for further details.
Outlook
Looking ahead, our views have not changed materially since our last report to shareholders in June 2021. We remain positive on the outlook for the Russian economy, which will be assisted by the increasing pace of the country's vaccination programme, the improving global economic outlook and the associated demand for oil, gas and other commodities. As mentioned above, we expect a combination of strengthening demand and constraints on supply to push oil and gas prices higher in 2022.
Inflation has become a global concern, but in emerging markets, central banks are more focused on the subject and less willing to view inflationary pressures as 'transitory'. The Central Bank of Russia (CAR) began raising interest rates in March 2021 and has since increased rates by a total of 300bps, tightening at a much faster pace than central banks in other jurisdictions. In our view, the CAR is likely to raise rates further, to dampen near-term inflation pressures, although it is possible that the CAR may begin cutting rates later in 2022 as aggressively as they have hiked them in 2021, if inflation pressures subside.
Higher rates will continue to support the rouble, which is already one of the strongest emerging markets currencies and is likely to experience further absolute and relative appreciation in 2022.
For us, the major uncertainty at present is the extent to which Covid-19 will continue to adversely impact economic activity. Although 60% of the Russian population was vaccinated by the end of October, we expect consumers and businesses to remain uncertain about the economic outlook, and thus risk averse, until the pandemic recedes and some semblance of 'normality' is restored. In addition, the recent conflict in Kazakhstan has negatively impacted the share price of Halyk and Kaspi, which represented approximately 5% of the Company's portfolio. We expect performance to eventually revert to pre- crisis levels.
On the political front, tensions between Russia and the West continue to escalate, exacerbated by the renewed build-up of Russia's military presence on it border with Ukraine. We do not foresee any significant progress on the diplomatic front, as it would require a major shift in the positions of all parties, and we doubt that the Russian government will withdraw from the Crimea in the foreseeable future. However, we do not expect the situation to deteriorate into actual conflict. The current stalemate is most likely to persist until there are leadership changes in the countries involved in the conflict, or until a deterioration in Russia's economy increases pressure for a resolution. Sanctions are thus likely to remain in place for the foreseeable future, although we do not expect them to have much economic impact. Russian-US trade is minimal. The EU and China are Russia's major trading partners, and trade with these countries is likely to continue despite sanctions. We will continue to monitor the situation closely.
Although there are challenges ahead, as ever, we believe the fundamental case for investing in Russia remains compelling for those investors with a long term perspective and tolerance of intermittent short-term volatility. The market offers very low price/earnings multiples, combined with one of the world's highest dividend yields, which is likely to continue to attract both foreign and domestic investors seeking diversified income in the current, low interest rate environment. Furthermore, we expect earnings and dividends to increase by more than 20% in 2022, driven by robust commodity prices, especially strong oil and gas prices.
Despite the Company's recent relative underperformance, we believe our long term track record of outperforming against the benchmark affirms the merits of our investment approach. We remain confident that our focus on quality, income generating stocks is the best way to capitalise on the opportunities available in the Russian market. Our portfolio is underpinned by several 'dividend hero' stocks whose dividend track records are expected to remain strong. We will continue our endeavours to actively add value for shareholders by investing in robust and improving businesses, so that the portfolio is well placed to weather any adverse investment conditions which may lie ahead, and realise our objective to maximise total returns to our shareholders over the long term.
Oleg I. Biryulyov
Habib Saikaly
Investment Managers 24th January 2022
PRINCIPAL AND EMERGING risks
The Directors confirm that they have carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. With the assistance of JPMF, the Audit & Risk Committee has drawn up a risk matrix, which identifies the key risks to the Company. These are reviewed and noted by the Board. The risks identified and the broad categories in which they fall, and the ways in which they are managed or mitigated are summarised below. The AIC Code of Corporate Governance requires the Audit & Risk Committee to put in place procedures to identify emerging risks. The key emerging risks identified are also summarised below.
|
Principal Risk |
Description |
Mitigating Activities |
|
Investment Management |
|
|
|
and Performance |
|
|
|
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 Offer and Discount Control arrangements, including recent updates, see Key Features at the front of this document. |
|
Investment Underperformance and Strategy |
An inappropriate investment strategy, for example asset allocation may lead to underperformance against the Company's benchmark index and peer companies. |
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. |
|
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 21 on pages 75 to 79 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 20 on page 74 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. |
|
Operational Risks |
|
|
|
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 21(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 44 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. |
|
Regulatory Risks |
|
|
|
Board Relationship with Shareholders |
The risk that the Company's strategy and performance does not align with shareholders expectations. |
The Manager addresses this by the organisation of a programme of calls with 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. 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. |
The Manager makes recommendations to the Board on accounting, dividend and tax policies and the Board seeks external advice where appropriate. The Manager closely monitors political and economic developments and reports significant events to the Board either at scheduled meetings or when an event arises. The Board factor in the status of current political and economic developments in their decision making. |
|
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. The Board and its Committees reviews the status of the Company's regulatory and legal requirements at regular intervals. |
|
Pandemic Risks |
|
|
|
Pandemics |
Covid-19 has highlighted the speed and extent of economic damage that can arise from a pandemic. This can cause a significant reduction in the valuation of companies in the portfolio. While current vaccination programme results are hopeful, the risk remains that new variants may not respond to existing vaccines, may be more lethal and may spread as global travel opens up again. |
The Board receives reports on the business continuity plans of the Manager and other key service providers. The effectiveness of these measures have been assessed throughout the course of the Covid-19 pandemic and the Board will continue to monitor developments as they occur and seek to learn lessons which may be of use in the event of future pandemics. |
|
Emerging Risk |
Description |
Mitigating Activities |
|
Global Crisis |
A wide scale economic crisis which could be caused by a number of catastrophic events such a climate change, may cause significant reductions in the valuations of companies in the portfolio. |
The Board keeps informed of economic developments through and latest ESG requirements regular updates from the Manager. |
|
Global Trade Protectionism |
A reduction in the global trading arising from increased barriers to trade is a risk to economic growth, to investors' risk appetites and, consequently, to the valuations of companies in the portfolio. |
The Board can, with shareholder approval, look to amend the investment policy and objectives of the Company to gain exposure to or mitigate the risks. |
|
Climate Change |
Climate change, which barely registered with investors a decade ago, has today become one of the most critical issues confronting asset managers and their investors. Investors can no longer ignore the impact that the world's changing climate will have on their portfolios, with the impact of climate change on returns now inevitable. |
The Board is also considering the threat posed by the direct impact on climate change on the operations of the Manager and other major service providers. As extreme weather events become more common, the resiliency, business continuity planning and the location strategies of our services providers will come under greater scrutiny. The Board also receives ESG reports from the Manager and the way ESG considerations are integrated into the investment decision-making. |
Transactions with the Manager and related parties
Details of the management contract are set out in the Directors' Report on page 39 of the Company's Annual Report and Financial Statements. The management fee payable to the Manager for the year was £3,254,000 (2020: £3,263,000) of which £nil (2020: £nil) was outstanding at the year end.
Included in note 6 on page 68 of the Company's Annual Report and Financial Statements are safe custody fees amounting to £182,000 (2020: £127,000) payable to JPMorgan Chase Bank N.A. during the year of which £81,000 (2020: £21,000) 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 £73,000 (2020: £27,000) of which £nil (2020: £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 £10,638,000 (2020: £3,886,000). Interest amounting to £6,000 (2020: £45,000) was receivable during the year of which £1,000 (2020: £nil) was outstanding at the year end.
Handling charges on dealing transactions amounting to £199,000 (2020: £131,000) were payable to JPMorgan Chase Bank N.A. during the year of which £72,000 (2020: £2,000) was outstanding at the year end.
Dividend Charges of £197,000 (2020: £342,000) identified in note 6 of the Company's Annual Report and Financial Statements . Other administrative expenses include £nil (2020: £nil) 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 £313,000 (2020: £243,000) was held with JPMorgan Chase Bank, N.A.. A net amount of interest of £4,000 (2020: £55,000) was receivable by the Company during the year from JPMorgan Chase.
Full details of Directors' remuneration and shareholdings can be found on page 50 and in note 6 on page 68 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:
• 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;
• 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; and
• 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 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
24th January 2022
statement of comprehensive income
for the year ended 31st October 2021
|
|
2021 |
2020 |
|||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Gains/(losses) on investments held at |
|
|
|
|
|
|
|
|
fair value through profit or loss |
|
- |
141,540 |
141,540 |
- |
(75,410) |
(75,410) |
|
Net foreign currency (losses)/gains |
|
- |
(444) |
(444) |
- |
53 |
53 |
|
Income from investments |
|
19,691 |
- |
19,691 |
20,107 |
- |
20,107 |
|
Interest receivable |
|
10 |
- |
10 |
100 |
- |
100 |
|
Gross return/(loss) |
|
19,701 |
141,096 |
160,797 |
20,207 |
(75,357) |
(55,150) |
|
Management fee |
|
(1,302) |
(1,952) |
(3,254) |
(1,305) |
(1,958) |
(3,263) |
|
Other administrative expenses |
|
(815) |
- |
(815) |
(932) |
- |
(932) |
|
Net return/(loss) before finance costs |
|
|
|
|
|
|
|
|
and taxation |
|
17,584 |
139,144 |
156,728 |
17,970 |
(77,315) |
(59,345) |
|
Finance costs |
|
(2) |
- |
(2) |
(10) |
- |
(10) |
|
Net return/(loss) before taxation |
|
17,582 |
139,144 |
156,726 |
17,960 |
(77,315) |
(59,355) |
|
Taxation (charge)/relief |
|
(2,552) |
- |
(2,552) |
(2,585) |
117 |
(2,468) |
|
Net return/(loss) after taxation |
|
15,030 |
139,144 |
154,174 |
15,375 |
(77,198) |
(61,823) |
|
Return/(loss) per share |
|
35.53p |
328.95p |
364.48p |
34.01p |
(170.78)p |
(136.77)p |
statement of changes in equity
for the year ended 31st October 2021
|
|
Called up |
Capital |
|
|
|
|
|
|
share |
redemption |
Other |
Capital |
Revenue |
|
|
|
capital |
reserve |
reserve1 |
reserves1 |
reserve1 |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
At 31st October 2019 |
462 |
139 |
12,528 |
333,503 |
13,708 |
360,340 |
|
Repurchase and cancellation of the |
|
|
|
|
|
|
|
Company's own shares |
(28) |
28 |
(12,528) |
(4,378) |
- |
(16,906) |
|
Net (loss)/return |
- |
- |
- |
(77,198) |
15,375 |
(61,823) |
|
Dividends paid in the year (note 3) |
- |
- |
- |
- |
(15,512) |
(15,512) |
|
At 31st October 2020 |
434 |
167 |
- |
251,927 |
13,571 |
266,099 |
|
Repurchase and cancellation of the |
|
|
|
|
|
|
|
Company's own shares |
(26) |
26 |
- |
(18,964) |
- |
(18,964) |
|
Net return |
- |
- |
- |
139,144 |
15,030 |
154,174 |
|
Dividends paid in the year (note 3) |
- |
- |
- |
- |
(4,294) |
(4,294) |
|
At 31st October 2021 |
408 |
193 |
- |
372,107 |
24,307 |
397,015 |
1 Other reserve, revenue reserve and the capital reserves form the distributable reserves of the Company and may be used to fund distributions to shareholders. See note 15 on page 72 of the Company's Annual Report and Financial Statements for details . The revenue reserve does not reflect the interim dividend of £10,311,000 which was paid on 5th November 2021 and, when paid, reduced the revenue reserve to £13,996,000.
statement of financial position
at 31st October 2021
|
|
|
2021 |
2020 |
|
|
|
£'000 |
£'000 |
|
Fixed assets |
|
|
|
|
Investments held at fair value through profit or loss |
|
385,822 |
261,864 |
|
Current assets |
|
|
|
|
Debtors |
|
716 |
612 |
|
Cash and cash equivalents |
|
10,951 |
4,129 |
|
|
|
11,667 |
4,741 |
|
Current liabilities |
|
|
|
|
Creditors: amounts falling due within one year |
|
(414) |
(506) |
|
Derivative financial liabilities |
|
(60) |
- |
|
Net current assets |
|
11,193 |
4,235 |
|
Total assets less current liabilities |
|
397,015 |
266,099 |
|
Net assets |
|
397,015 |
266,099 |
|
Capital and reserves |
|
|
|
|
Called up share capital |
|
408 |
434 |
|
Capital redemption reserve |
|
193 |
167 |
|
Capital reserves |
|
372,107 |
251,927 |
|
Revenue reserve1 |
|
24,307 |
13,571 |
|
Total shareholders' funds |
|
397,015 |
266,099 |
|
Net asset value per share |
|
973.6p |
613.4p |
1 The revenue reserve does not reflect the interim dividend of £10,311,000 which was paid on 5th November 2021 and, when paid, reduced the revenue reserve to £13,996,000.
statement of cash flows
for the year ended 31st October 2021
|
|
|
2021 |
2020 |
|
|
|
£'000 |
£'000 |
|
Net cash outflow from operations before dividends and interest |
|
(4,543) |
(4,131) |
|
Dividends received |
|
16,955 |
18,551 |
|
Interest received |
|
11 |
98 |
|
Overseas tax recovered/(paid) |
|
66 |
(15) |
|
Interest paid |
|
(2) |
(10) |
|
Net cash inflow from operating activities |
|
12,487 |
14,493 |
|
Purchases of investments |
|
(151,554) |
(124,238) |
|
Sales of investments |
|
168,990 |
144,628 |
|
Settlement of forward currency contracts |
|
29 |
6 |
|
Net cash inflow from investing activities |
|
17,465 |
20,396 |
|
Repurchase and cancellation of the Company's own shares |
|
(18,986) |
(17,292) |
|
Dividends paid |
|
(4,294) |
(15,512) |
|
Net cash outflow from financing activities |
|
(23,280) |
(32,804) |
|
Increase in cash and cash equivalents |
|
6,672 |
2,085 |
|
Cash and cash equivalents at start of year |
|
4,129 |
2,060 |
|
Exchange movements |
|
150 |
(16) |
|
Cash and cash equivalents at end of year |
|
10,951 |
4,129 |
|
Increase in cash and cash equivalents |
|
6,672 |
2,085 |
|
Cash and cash equivalents consist of: |
|
|
|
|
Cash and short term deposits |
|
313 |
243 |
|
Cash held in JPMorgan US Dollar Liquidity Fund |
|
10,638 |
3,886 |
|
Total |
|
10,951 |
4,129 |
Notes to the financial statements
for the year ended 31st October 2021
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 FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' 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 in October 2019.
All of the Company's operations are of a continuing nature. The Directors seek the shareholders approval to the ordinary resolution for the Company to continue as an investment trust.
The financial statements have been prepared on a going concern basis. In forming this opinion, the directors have considered any potential impact of Covid-19 pandemic on the going concern and viability of the Company. They have considered the potential impact of Covid-19 and the mitigation measures which key service providers, including the Manager, have in place to maintain operational resilience particularly in light of Covid-19. The Directors have reviewed income and expense projections and the liquidity of the investment portfolio in making their assessment.
The policies applied in these financial statements are consistent with those applied in the preceding year.
2. Return/(loss) per share
|
|
2021 |
2020 |
|
|
£'000 |
£'000 |
|
Revenue return |
15,030 |
15,375 |
|
Capital return/(loss) |
139,144 |
(77,198) |
|
Total return/(loss) |
154,174 |
(61,823) |
|
Weighted average number of shares in issue during the year |
42,299,516 |
45,203,549 |
|
Revenue return per share |
35.53p |
34.01p |
|
Capital return/(loss) per share |
328.95p |
(170.78)p |
|
Total return/(loss) per share |
364.48p |
(136.77)p |
3. Dividends
Dividends paid and proposed
|
|
2021 |
2020 |
|
|
£'000 |
£'000 |
|
Dividends paid |
|
|
|
2020 final dividend of 10.0p (2019: 10.0p) |
4,294 |
4,601 |
|
2020 interim dividend of 25.0p |
- |
10,911 |
|
|
4,294 |
15,512 |
|
Dividend declared |
|
|
|
2021 interim dividend of 25.0p |
10,311 |
- |
|
Dividend proposed |
|
|
|
2021 final dividend of 10.0p (2020: 10.0p) |
4,078 |
4,338 |
The dividend proposed in respect of the year ended 31st October 2020 amounted to £4,338,000. However the amount paid amounted to £4,294,000 due to shares repurchased after the balance sheet date but prior to the share register record date.
The interim dividend declared in respect of the year ended 31st October 2021 amounted to £10,311,000 was paid on 5th November 2021.
The final dividend proposed in respect of the year ended 31st October 2021 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 2022.
4. Net asset value per share
|
|
2021 |
2020 |
|
Net assets (£'000) |
397,015 |
266,099 |
|
Number of shares in issue |
40,776,176 |
43,378,912 |
|
Net asset value per share |
973.6p |
613.4p |
5. Status of announcement
2020 Financial Information
The figures and financial information for 2020 are extracted from the Annual Report and Accounts for the year ended 31st October 2020 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.
2021 Financial Information
The figures and financial information for 2021 are extracted from the Annual Report and Accounts for the year ended 31st October 2021 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
25th January 2022
ENDS
Annual Report and Financial Statements
The Annual Report and Financial Statements will be posted to shareholders on or around 31 January 2022 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 be submitted to the FCA's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
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.
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