Half-year Report

RNS Number : 7248R

JPMorgan Russian Securities PLC

18 June 2018

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
30TH APRIL 2018

Legal Entity Identifier:

549300II3MHI98ZLVH37 Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

Performance

It has been a difficult six months for investors in Russia. When I wrote my Chairman's statement for the Annual Report last January I referred to the political risk but I do not think that anyone would have anticipated the extent to which relationships between the West and Russia deteriorated over the next few months. However what I said at that time about the economy in Russia continuing to grow remains true and the Company is invested in companies with strong balance sheets, able to support substantial dividend payouts.

During the six months ended 30th April 2018 the Company's net asset value on a total return basis increased 2.2% and the Company's return to shareholders on a total return basis was positive 1.1% over the period. It is pleasing that both these measures were ahead of the Company's benchmark (RTS index) which returned 0.6% on a total return basis. The Company's discount to net asset value has remained disappointingly wide and was slightly higher at the end of the period at 15.6% (at the end of the Company's last financial year the discount was 14.5%). The average discount over the period was 13.8%. However, this is not surprising given the increasing sanctions against Russia and political tensions that persist between Russia and many other major nations.

Russia's international relations with the United States and European governments have fallen to a new low during the period, as demonstrated by the repatriation of embassy staff following alleged Russian government involvement in the poisoning of a former Russian spy and his daughter in the UK in March. Relations soured further with allegations that Russian backed Syrian military launched a chemical attack on Syrian civilians in a suburb of Damascus. The United States reacted to these events by introducing further economic sanctions on Syrian sites suspected of being involved with chemical weapons.

As referred to in the Company's announcement on the 13th April 2018, the only holding in the Company's portfolio directly impacted by the new sanctions was United Company Rusal, a major aluminium producer. This investment represented approximately 1% of the Company's portfolio, and in compliance with the sanctions, the forced disposal of Rusal cost the Company 0.52% in performance terms.

Although at the time of writing there have been no further major incidents, it is clear that events have the potential to escalate. This could give rise to further economic sanctions against Russia that adversely affect Russian companies and the market and hence potentially the Company's performance. JPMorgan Asset Management's compliance function monitors the Company's investments and provides assurances of compliance with the current sanctions regime. In addition JPMorgan and the Board closely monitor both economic and political risks to the Company.

The Investment Managers Report includes further comment on the economic and political impacts on the Russian market.

Discount Control

The Board's objective remains 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. During the period the discount ranged from 10.7% to 17.6%. Following discussion with the Company's major shareholders during the period, the Board has agreed that, subject to market conditions, it will 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 six month period 1,226,443 shares were bought back, approximately 2.4% of the Company's issued share capital at 30th April 2018. The average discount at which these shares were bought back was 13.8% and these buybacks represented approximately 18.0% of traded market volume during the period in which they were undertaken.

It is hoped that this buy back strategy will have the effect of gradually stabilising and narrowing the discount at which the Company trades. The policy was initiated in January and since that time the political turmoil has been such that it is no surprise the discount remains wider than we would like it to be.

Revenue, Earnings and Dividend

Revenue for the six month period to 30th April 2018 after taxation was £2,188,000 (2017: £1,460,000) and the return per share, calculated on the basis of the average number of shares in issue was 4.22 pence (2017: 2.79 pence) per share.

The Company's current income forecast for the year indicates continuing growth in dividend income. Following the pattern of the previous year, the Company's interim dividend is expected to be considered by the Board for declaration in September 2018 and is likely to represent the large majority of the total annual dividend, with a significantly smaller final dividend being recommended for approval by the shareholders at the Annual General Meeting for payment in March 2019.

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 approximately 100 investment professionals. This strength and depth is one of the advantages of having the fund managed by a major investment house such as JPMorgan Asset Management. The Board reviews the performance of the Investment Managers each year and works pro-actively with the house to improve all aspects of the running of the Company.

The Investment Managers have maintained a consistent approach to investing in well managed companies with strong balance sheets. They continue to believe that the equity market in Russia provides a good long term investment opportunity, despite the significant political risks, if the right stocks are selected. The relatively high levels of dividend payments in the Russian corporate sector is forecast to continue, as is the generally stable domestic economic outlook, with no large changes anticipated in interest rates or inflation. The price of oil is a major determining factor for the Russian economy and a recent increase in tensions in the Middle-East has contributed to a rising oil price. The recent rise in the price of oil is yet to be reflected in the performance of the Russian market. For those prepared to ride out this time of heightened tension the underlying investment case for investing in Russia remains strong.

Gill Nott

Chairman

15^th June 2018

INVESTMENT MANAGER'S REPORT

Market review and performance

During the six months under review, the Company's net asset value was up 2.2% on a total return basis, and the return to shareholders was 1.1% in sterling terms. This resulted in the Company outperforming its benchmark, the RTS Index, by 1.6% on a net asset value total return basis.

The Russian market started the period strongly supported by rising oil prices and the Central Bank further cutting interest rates, a trend which has continued against the tide of global tightening. In February, S&P upgraded Russian debt to investable rating amid signs of an improving economic outlook. However the U.S. announcement of sanctions in April was a surprise and hit the market hard. April saw Russia as one of the weakest markets globally, negatively impacted by currency losses following the imposition of additional U.S. sanctions.

As the uncertainty surrounding further sanctions reduces, the stronger oil price is proving supportive for the economy and dividend payouts are continuing on the positive trend highlighted in the Company's previous annual report.

Post reporting period, on 7th May, Vladimir Putin was inaugurated as President for another six years as anticipated.

Portfolio positioning

We actively manage your portfolio and continue to build up internal research capabilities and a growing team of professional analysts with deep expertise in emerging markets and Russia/Commonwealth of Independent States (CIS) markets.

In terms of portfolio activity, we would highlight that:

During the period we took profits from energy names Tatneft and Gazprom, and also Sberbank on the back of share price strength. We continued to trim our position in Evraz, a multinational vertically integrated steel making and mining company, taking advantage of strong performance.

With regards to additions:

We bought Norilsk Nickel, a palladium and nickel mining and smelting company. The weaker ruble and stronger metals prices made this stock more attractive.

We also initiated a position in Surgutneftgaz, an oil and gas company. We view this company as a compelling opportunity given their significant USD cash reserves and strong balance sheet.

Our energy holdings are relatively high as we continue to see a better outlook for energy prices and dividend stories there.

On the positive side, we gained from our positions in:

Magnit - our recent move to underweight exposure in Magnit, Russia's largest retailer, contributed to relative returns, as the stock fell sharply following the abrupt departure of founding CEO Sergey Galitskiy, and the impact of several macro factors, such as a lack of food price inflation, subdued disposable income growth, and elevated competition.

Sberbank - The company reported strong preliminary results for 2017, boosted by solid net-interest-margin (NIM) performance, continuing mortgage growth, strong deposit inflows and a seasonal decline in the corporate loan book. We are encouraged by the long-term investment opportunity that Sberbank offers, and the company's investor day in December reaffirmed our view.

In a similar vein, our lack of exposure to VTB contributed. The company struggled in a low interest rate, low volatility environment. As a reminder, we do not own this company due to capital allocation concerns, preferring the quality and market leadership of Sberbank.

Evraz, a steel and mining company, has been a beneficiary of the rally in coal prices and a turnaround in the steel industry, which has been driven the supply reforms in the Chinese steel market.

Notable stock-level detractors were:

Rusal - the company was specifically targeted by the new sanctions, requiring US investors to divest of all assets related to the company by 7th May. It was clearly very difficult to dispose of the stock but we did so to comply with these restrictions.

Sollers - the auto manufacturer fell on the back of news that the board of directors decided not to pay a dividend to its shareholders.

The position in Ros-Agro, an agricultural commodity and food business detracted on the back of weaker-than-expected numbers, as the company continues to be impacted by weakness in sugar prices. We have high conviction in this name for the long term and will continue to hold the stock through this underperformance.

Outlook

The most recent reminder of the risks in this market came in the form of a new round of Russia sanctions announced in April, largely covering companies associated with oligarch Oleg Deripaska. The new sanctions were a surprise to the market in timing and in substance. However, we believe that their impact will be transitory. To us, they are a reminder of the importance of assessing the complete set of risks associated with a particular investment (in emerging markets or elsewhere) and of the importance of diversification. Our portfolio has not been immune to the impact of these sanctions, but we believe well-managed, profitable companies in Russia - will overcome short-term pressures and outperform over time.

While this has had an impact on the broader market, we have held a constructive view on Russian equities based on: (a) orthodox economic policies which have contained fiscal deficits and inflation; (b) a gradual recovery in domestic demand which is supporting corporate earnings; and (c) valuation support from rising dividend payouts and a high dividend yield (which is now above 6%).

An improving domestic economy, backed by earnings growth and rising commodity prices, is supportive for Russian equities, with potential upside coming from stronger investments and the recovery of domestic consumption. The lower level of inflation gives the Central Bank room to support more rate cuts in the next 12-18 months. Additionally, the domestic political outlook is stable following recent presidential elections, although we would expect to see some rotation of specialists in the government and presidential administration.

We continue to believe that Russian equity valuations are supportive for investors who are willing to accept the current level of country risk.

Oleg I. Biryulyov

Habib Saikaly

Investment Managers

15^th June 2018

INTERIM MANAGEMENT REPORT

The Company is required to make the following disclosures in its half year report.

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company remain unchanged and fall into the following broad categories: investing in Russia; share price discount and Net Asset Value per share; investment underperformance and strategy; failure of investment process; loss of investment team and Manager; operational and cyber crime; board relationship and shareholders; political and economic regulatory and legal market and financial. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st October 2017.

Related Parties Transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the period.

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operation existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

Directors' Responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i)    the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with FRS 104 'Interim Financial Reporting' and gives a true and fair view of the state of affairs of the Company and of the assets/liabilities, financial position and net return/loss of the Company, as at 30th April 2018 as required by the UK Listing Authority Disclosure and Transparency Rule 4.2.4R; and

(ii)   the interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.

In order to provide these confirmations, and in preparing these financial 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 that they have done so.

For and on behalf of the Board

Gill Nott

Chairman

15^th June 2018

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30TH APRIL 2018

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th April 2018			30th April 2017			31st October 2017
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value through profit or loss	-	5,069	5,069	-	17,281	17,281	-	17,750	17,750
Net foreign currency losses	-	(55)	(55)	-	(58)	(58)	-	(42)	(42)
Income from investments	3,102	-	3,102	2,519	-	2,519	15,957	-	15,957
Interest receivable and similar income	17	-	17	8	-	8	23	-	23
Gross return	3,119	5,014	8,133	2,527	17,223	19,750	15,980	17,708	33,688
Management fee	(313)	(1,253)	(1,566)	(305)	(1,219)	(1,524)	(598)	(2,391)	(2,989)
Other administrative expenses	(395)	-	(395)	(365)	-	(365)	(1,017)	-	(1,017)
Net return on ordinary activities before finance costs and taxation	2,411	3,761	6,172	1,857	16,004	17,861	14,365	15,317	29,682
Finance costs	-	(1)	(1)	-	-	-	-	-	-
Net return on ordinary activities before taxation	2,411	3,760	6,171	1,857	16,004	17,861	14,365	15,317	29,682
Taxation (charge)/credit	(223)	-	(223)	(397)	237	(160)	(1,822)	-	(1,822)
Net return on ordinary activities after taxation	2,188	3,760	5,948	1,460	16,241	17,701	12,543	15,317	27,860
Return per share (note 3)	4.22p	7.24p	11.46p	2.79p	31.03p	33.82p	23.97p	29.27p	53.24p

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30TH APRIL 2018

	Called up	Capital
	share	redemption	Other	Capital	Revenue
	capital	reserve	reserve	Reserves 1	Reserve 1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 30th April 2018 (Unaudited)
At 31st October 2017	523	78	46,838	245,854	7,068	300,361
Repurchase and cancellation of the Company's own shares	(12)	12	(6,420)	-	-	(6,420)
Net return on ordinary activities	-	-	-	3,760	2,188	5,948
Dividend paid in the period (note 4)	-	-	-	-	(3,119)	(3,119)
At 30th April 2018	511	90	40,418	249,614	6,137	296,770
Six months ended 30th April 2017 (Unaudited)
At 31st October 2016	524	77	47,204	230,537	6,552	284,894
Net return on ordinary activities	-	-	-	16,241	1,460	17,701
Dividend paid in the period (note 4)	-	-	-	-	(4,187)	(4,187)
At 30th April 2017	524	77	47,204	246,778	3,825	298,408
Year ended 31st October 2017 (Audited)
At 31st October 2016	524	77	47,204	230,537	6,552	284,894
Repurchase and cancellation of the Company's own shares	(1)	1	(366)	-	-	(366)
Net return on ordinary activities	-	-	-	15,317	12,543	27,860
Dividends paid in the year (note 4)	-	-	-	-	(12,027)	(12,027)
At 31st October 2017	523	78	46,838	245,854	7,068	300,361

1 These reserves form distributable reserves of the Company and may be used to fund distribution of profits to investors via dividend payments.

STATEMENT OF FINANCIAL POSITION AT 30TH APRIL 2018

	(Unaudited)	(Unaudited)	(Audited)
	30th April 2018	30th April 2017	31st October 2017
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	294,504	297,491	294,066
Current assets
Derivative financial assets	1	-	-
Debtors	1,659	377	5,145
Cash and cash equivalents	1,789	3,020	1,281
	3,449	3,397	6,426
Current liabilities
Creditors: amounts falling due within one year	(1,183)	(2,480)	(131)
Net current assets	2,266	917	6,295
Total assets less current liabilities	296,770	298,408	300,361
Net assets	296,770	298,408	300,361
Capital and reserves
Called up share capital	511	524	523
Capital redemption reserve	90	77	78
Other reserve	40,418	47,204	46,838
Capital reserves	249,614	246,778	245,854
Revenue reserve	6,137	3,825	7,068
Total shareholders' funds	296,770	298,408	300,361
Net asset value per share (note 5)	581.5p	570.2p	574.7p

STATEMENT OF CASH FLOWS

 FOR THE SIX MONTHS ENDED 30TH APRIL 2018

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2018	30th April 2017	31st October 2017
	£'000	£'000	£'000
Net cash outflow from operations before dividends and interest	(2,007)	(1,879)	(4,030)
Dividends received	3,426	2,350	13,540
Interest received	17	8	23
Overseas tax paid	-	(52)	(53)
Interest paid	(1)	-	-
Net cash inflow from operating activities	1,435	427	9,480
Purchases of investments	(40,515)	(64,283)	(101,778)
Sales of investments	48,845	65,992	100,857
Settlement of forward currency contracts	(9)	(26)	(26)
Net cash inflow/(outflow) from investing activities	8,321	1,683	(947)
Repurchase and cancellation of the Company's own shares	(6,142)	-	(364)
Dividends paid	(3,108)	(4,187)	(12,038)
Net cash outflow from financing activities	(9,250)	(4,187)	(12,402)
Increase/(decrease) in cash and cash equivalents	506	(2,077)	(3,869)
Cash and cash equivalents at start of period/year	1,281	5,150	5,150
Exchange movements	2	(53)	-
Cash and cash equivalents at end of period/year	1,789	3,020	1,281
Increase/(decrease) in cash and cash equivalents	506	(2,077)	(3,869)
Cash and cash equivalents consist of:
Cash and short term deposits	519	3,020	253
Cash held in JPMorgan US Dollar Liquidity Fund	1,270	-	1,028
Total	1,789	3,020	1,281

NOTES TO THE FINANCIAL STATEMENTS  FOR THE SIX MONTHS ENDED 30TH APRIL 2018

1.  Financial statements

The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 31st October 2017 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies and including the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.  Accounting policies

The financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the revised 'SORP') issued by the Association of Investment Companies in November 2014 and updated in February 2018.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015 has been applied in preparing this condensed set of financial statements for the six months ended 30th April 2018.

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

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st October 2017.

3.  Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2018	30th April 2017	31st October 2017
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	2,188	1,460	12,543
Capital return	3,760	16,241	15,317
Total return	5,948	17,701	27,860
Weighted average number of shares in issue	51,899,865	52,337,112	52,325,194
Revenue return per share	4.22p	2.79p	23.97p
Capital return per share	7.24p	31.03p	29.27p
Total return per share	11.46p	33.82p	53.24p

4.  Dividends paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2018	30th April 2017	31st October 2017
	£'000	£'000	£'000
2017 final dividend of 6.0p (2016: 8.0p)	3,119	4,187	4,187
2017 interim dividend of 15.0p	-	-	7,840
Total dividends paid in the period/year	3,119	4,187	12,027

All dividends paid in the period/year have been funded from the revenue reserve.

The 2018 interim dividend is expected to be payable in October 2018.

5. Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2018	30th April 2017	31st October 2017
Net assets (£'000)	296,770	298,408	300,361
Number of shares in issue	51,035,669	52,337,112	52,262,112
Net asset value per share	581.5p	570.2p	574.7p

JPMORGAN FUNDS LIMITED

18th June 2018

For further information, please contact:

Paul Winship

For and on behalf of

JPMorgan Funds Limited

020 7742 4000

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.

JPMORGAN FUNDS LIMITED

ENDS

A copy of the half year will be submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do

The half year will also shortly be available on the Company's website at www. 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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