Half Yearly Report

RNS Number : 9773P

JPMorgan Russian Securities PLC

11 June 2015

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

UNAUDITED HALF YEAR RESULTS FOR

THE SIX MONTHS ENDED 30TH APRIL 2015

Chairman's Statement

Performance

Over the six month period ended 30th April 2015 regrettably your Company continued to experience challenging markets and suffered from poor performance. The Company's net asset value on a total return basis declined by 2.7% and the Company's return to shareholders on a total return basis was a negative 2.2% over the period, which led to little change in the discount to net asset value at 14.1%. The Company's performance in terms of return to shareholders on a total return basis was 3.7% below the benchmark, which ended the reporting period up 1.5%.

The period saw extreme market volatility driven largely by the combination of significant falls in the oil price and ruble devaluation, which negatively impacted the Company's net asset value and share price. Extreme interest rate volatility also played its part in creating a hostile environment for the Russian equity market, although this abated to some extent in 2015, with little significant tightening of the economic sanctions regime and apparent relative stability of the situation in Ukraine following the Minsk II agreement in February.

Discount Control

The Company repurchased 195,000 shares for cancellation at an average discount to net asset value of 15.9%, which resulted in a cumulative increase in net asset value per share of 0.2 pence. 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. The Board operates a policy under which the Company intends, subject to market conditions, to buy shares at discounts above 8% to achieve this. At present there is increased volatility in the Russian market and the Company's discount to net asset value, therefore the Board may refrain from implementing share buybacks when the discount widens beyond 8% if it does not believe that this course of action would assist in stabilising the discount. The Board continues to monitor the situation.

Revenue and Earnings

Despite the disappointing performance of the equity market and difficult economic circumstances in general, the Company's income from its investments increased markedly in the period. This illustrates the trend we have alluded to in previous reports of a growing number of Russian companies committing to significant dividend payouts. There can be no guarantee that the historically high level of dividend receipts will be sustained given the downturn in economic growth in 2015. Nonetheless if portfolio companies maintain the current level of earnings distributions, it seems likely that a final dividend similar to that paid in the previous year will be proposed for the year ended 31st October 2015, to be paid to shareholders in the first quarter of 2016.

Board of Directors

I have been a Director of the Company since 2002 and have chaired the Board since 2013. Due to the increasing time demands required of a chairman of an investment trust company and my other work commitments I have decided to stand down as Chairman of the Company's Board following release of these results on 11th June 2015 and the Board has agreed that Gill Nott will replace me as Chairman effective from the day after the release of these results i.e. 12th June 2015. At the Board's request, I intend to remain as a Director of the Company until the forthcoming Annual General Meeting in March 2016. I have very much enjoyed my time as Chairman and I am confident that the Board and the Manager have the experience needed to steer the Company from here on.

Outlook

The lack of a lasting resolution to the conflict in Ukraine and the risk of further sanctions remain barriers to an improvement in investor sentiment towards the region. With the assistance of JPMorgan Asset Management's compliance and investment functions the Company remains compliant with all aspects of the sanctions regime that the US and EU authorities continue to apply to Russia, including the additional provisions introduced in December relating to the Crimea.

The price of oil is a major determining factor for the Russian economy, and it is difficult to predict its development, but at current levels GDP growth is likely to be subdued.

Despite these matters of concern, the resilience of the Russian corporate sector can be illustrated by its ability to adapt to changing economic conditions and to maintain impressive dividend distributions by historical standards. Moreover the economy has shown some signs of stabilising from the start of 2015 and should this trend continue, there is hope that in time investor interest will return to the region.

Your Board shares our Investment Manager's belief that equity markets in Russia still provide a good long term investment opportunity, although the path to recovery is not a straightforward one and requires the resolution of substantial geopolitical and economic issues.

Lysander Tennant

Chairman                                                                                                                                                                                                        11th June 2015

Investment Managers' Report

Market Commentary

The six month reporting period was highly eventful, so the pedestrian performance of +1.5% for the Company's benchmark MSCI Russian 10/40 Equity Index in sterling terms, belies the extent of market volatility during the period. At the nadir of the crisis on the 17th December 2014 the Company's share price had fallen by over 40%, but the ensuing three months of steady recovery eliminated most of those losses. The Company's NAV ended the period down 2.7%, and the share price fell 6.3%. The discount to NAV at 14.1% was 0.7% higher at the end of the period compared to its starting level. The market was effectively tracking the fortunes of the oil price and ruble/USD exchange rate, which both fell almost 40% in December and then recovered those losses in the first quarter of 2015. On the political front the uneasy ceasefire following the Minsk II peace treaty seems to be fragile and there are still some reports of conflict. The United States and European Union economic sanctions remain in force and their scope was extended in December 2014 to include the Crimea.

The Central Bank of Russia (CBR) and Russian Government made a drastic and, with the benefit of hindsight, well-timed interest rate hike in December 2015. The CBR increased the benchmark rate by 7.5% to prevent panic and stop the slide in the ruble. In total, the CBR raised interest rates by 11.5% in 2014 to 17.5%. In addition, the CBR supplied liquidity to the banking system to help industrials with short-term needs and to avoid a run on the banks. The ruble's fortunes were heavily influenced by the price of oil. At its low point the exchange rate with the US dollar fell to 79 RUB/USD in the middle of December 2014, from 45 RUB/USD at the end of October 2014. This followed a slide in the oil price to a low of $45 USD pbbl in early January 2015. In 2015 there was a complete reversal of those trades as oil jumped to $67 USD pbbl, and the ruble recovered to 52 RUB/USD, with the CBR cutting interest rates by 5% in the first four months of 2015. One positive outcome of this turmoil is that the CBR abandoned the regulation of exchange rates and allowed the ruble to become a fully flexible and market-driven currency. Following the sharp fall in the ruble/USD exchange rate in late 2014 there was a bounce in the currency and the Company's share price. Many global investors questioned whether their levels of Russian exposure were too low, but the rally in Chinese markets became the focus of attention and overshadowed events in the Russian equity market.

We are pleased with corporate earnings reports so far this year, with results illustrating that many Russian companies managed to avoid serious adverse performance. In addition, most dividend expectations had been fulfilled, although we cannot be certain how long these levels of dividend payouts will be maintained by companies in the Company's portfolio.

However, the Russian economy still faces significant challenges. The country's economic fortunes are still driven by the price of oil and the apparent lack of any reform agenda. However the third key driver for the time being is the conflict in Ukraine. The outlook for the oil price is difficult to determine and a prolonged period at current levels might create sufficient impetus for the authorities to accelerate reforms. If this were the case we could see an improvement in Russia's country specific risk rating, but as long as the conflict in Ukraine remains unresolved and economic sanctions are in place, investors will be wary of the Russian market.

Performance

The Company's share price return over the half year was negative in absolute and relative terms, lagging behind the index by 3.7% in the half year. The negative performance was a result in part of the relative underperformance of our large holding in Magnit (retailer), and of our underweight position in Alrosa (diamond mining), which outperformed significantly. Finally, the Company has no holding in VTB Bank, which also performed well. One of the reasons that the Company does not own VTB is because it almost became insolvent last year. Its strong performance is seen largely as a result of capital support recently provided by the Russian State.

Positive contributions arose from underweight positions in Rostelecom (fixed line telecoms), as we stayed clear from this name with a skeptical view of the corporate structure and outlook for regulated businesses. IBS / Luxoft (IT developers) is a fast-growing export oriented company which benefitted from re-organisation and performed well last year. The Company was obliged to sell its position in this stock as the re-organisation moved most of its business outside Russia and therefore it became ineligible under the terms of the Company's investment guidelines. Finally, the Company's performance continued to benefit from being underweight in the regulated utility sector, where Roshydro suffered badly from devaluation and the freeze of ruble tariffs.

We anticipate significant levels of ongoing volatility as the markets continue to lack both direction and liquidity. The Company's holdings represent an aggregate active bet of more than 50% against the benchmark (active meaning the extent to which the holdings of the Company's portfolio differs from the composition of the benchmark), so single month and quarter performances may have large deviations from our benchmark.

Portfolio Activity

In the period under review, we would like to highlight the following positions within the portfolio:

A focus for the portfolio was on export orientated companies which could benefit from the devaluation of the ruble.

Rosagro (agri-business) - this company delivered a good result on the back of volume growth in its pork and sugar business. It implemented a revised dividend policy with semi-annual payments linked to both net profit and free cash flow generated by the business in the period. We expect this business will continue to be re-rated as its valuation is still attractive. A large potential project in the Far East region could be a crucial factor for its long-term success story. The current growth of import substitution and the preferential business environment will enhance returns.

Yandex (internet services) - The company's management began to disappoint, and we liquidated the holding following a change in our view on the outlook for the company's product offering of electronic goods in a globalised market.

Finally, Surgutneftegas (energy) is regarded as a unique investment opportunity, with a cash position on its balance sheet in US dollars which exceeds its current market capitalisation. This resulted in the company booking a significant foreign exchange gain, which it is expected to distribute to shareholders via dividends. The scale of the gain is such that the Company is expecting a +20% dividend yield on its holding within the next 6 months. This is a windfall payment which is unlikely to be repeated.

Outlook

Your manager's investment approach remained constant throughout the period, and we will continue to adhere to what we regard as the important fundamentals of strong cash flow generation and good governance. The Company believes that in the long run, earnings growth and return on equity will dominate in driving potential returns for shareholders. Therefore, we are focusing on the consolidation of our holdings on those businesses we consider to be sustainable and able to deliver consistently high levels of return over the longer term. The Russian market continues to face a scarcity of such names, and as a result they likely are likely to trade at a premium to the rest of the market. Further diversification of the market through new issuance may be slow to materialise.

Instability of the oil price and complications in the global political background make life for Russian equity investors extremely eventful. Unfortunately extreme external factors, such as the price of oil, interest rates and geopolitical events including a forthcoming review by the European Union of the existing economic sanctions regime, may prevail in the short term and seem likely to overshadow corporate activity.

However for the medium term (over next five years ) and long term (10+ years) horizon, economic reforms and corporate capital allocation decisions seem likely to dominate as key factors for investment returns. We are reasonably optimistic about the outcome over the medium and longer term.

We anticipate that the earnings spiral is likely to bottom out in the second quarter of 2015, and we should start to see some positive economic and corporate profit forecasts in the second half of 2015.

We believe that while the long-term fundamental case for the Russian equity market is still intact and continues to provide ample opportunity for active fund managers to add value, short-term performance will be influenced by a number of tough economic and political challenges.

Oleg I. Biryulyov

Sonal Tanna

Investment Managers                                                                                                                                                                                11th June 2015

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 2014.

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 the Accounting Standards Board's Statement 'Half-Yearly Financial Reports'; 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

Lysander Tennant

Chairman

11th June 2015

Income Statement

for the six months ended 30th April 2015

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th April 2015			30th April 2014			31st October 2014
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Losses on investments held at
fair value through profit
or loss	-	(10,076)	(10,076)	-	(90,887)	(90,887)	-	(91,746)	(91,746)
Net foreign currency gains/(losses)	-	38	38	-	(139)	(139)	-	127	127
Income from investments	3,615	-	3,615	487	-	487	9,383	-	9,383
Gross return/(loss)	3,615	(10,038)	(6,423)	487	(91,026)	(90,539)	9,383	(91,619)	(82,236)
Management fee	(200)	(799)	(999)	(355)	(1,418)	(1,773)	(660)	(2,640)	(3,300)
Other administrative expenses	(348)	-	(348)	(292)	-	(292)	(787)	-	(787)
Net return/(loss) on ordinary
activities before taxation	3,067	(10,837)	(7,770)	(160)	(92,444)	(92,604)	7,936	(94,259)	(86,323)
Taxation	(410)	-	(410)	(37)	-	(37)	(907)	-	(907)
Net return/(loss) on ordinary
activities after taxation	2,657	(10,837)	(8,180)	(197)	(92,444)	(92,641)	7,029	(94,259)	(87,230)
Return/(loss) per share (note 4)	5.07p	(20.67)p	(15.60)p	(0.37)p	(175.86)p	(176.23)p	13.38p	(179.37)p	(165.99)p

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

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

Reconciliation of Movements in Shareholders' Funds

	Called up	Capital
Six months ended	share	redemption	Other	Capital	Revenue
30th April 2015	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2014	526	75	47,764	181,024	7,029	236,418
Repurchase of the Company's own
shares for cancellation	(2)	2	(559)	-	-	(559)
Net (loss)/return on ordinary activities	-	-	-	(10,837)	2,657	(8,180)
Dividend appropriated in the period	-	-	-	-	(6,804)	(6,804)
At 30th April 2015	524	77	47,205	170,187	2,882	220,875
	Called up	Capital
Six months ended	share	redemption	Other	Capital	Revenue
30th April 2014	capital	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2013	527	74	48,482	275,809	7,511	332,403
Repurchase of the Company's own
shares for cancellation 1	(1)	1	(718)	-	-	(718)
Net loss on ordinary activities	-	-	-	(92,444)	(197)	(92,641)
Dividend appropriated in the period	-	-	-	(526)	(7,511)	(8,037)
At 30th April 2014	526	75	47,764	182,839	(197)	231,007
	Called up	Capital
Year ended	share	redemption	Other	Capital	Revenue
31st October 2014	capital	reserve	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2013	527	74	48,482	275,809	7,511	332,403
Repurchase of the Company's own
shares for cancellation	(1)	1	(718)	-	-	(718)
Net (loss)/return on ordinary activities	-	-	-	(94,259)	7,029	(87,230)
Dividend appropriated in the year	-	-	-	(526)	(7,511)	(8,037)
At 31st October 2014	526	75	47,764	181,024	7,029	236,418

¹Restated due to the change in accounting treatment made at the 31st October 2014 year end. Costs of repurchasing ordinary shares are charged to 'Other reserve', previously 'Capital reserves'.

Balance Sheet

at 30th April 2015

	(Unaudited)	(Unaudited)	(Audited)
	30th April 2015	30th April 2014	31st October 2014
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	218,656	229,483	235,986
Investment in liquidity fund held at fair value through
profit or loss	-	1,416	-
Total investment portfolio	218,656	230,899	235,986
Current assets
Debtors	4,880	219	290
Cash and short term deposits	497	374	2,248
	5,377	593	2,538
Creditors: amounts falling due within one year	(3,158)	(485)	(2,106)
Net current assets	2,219	108	432
Total assets less current liabilities	220,875	231,007	236,418
Net assets	220,875	231,007	236,418
Capital and reserves
Called up share capital	524	526	526
Capital redemption reserve	77	75	75
Other reserve	47,205	47,764	47,764
Capital reserves	170,187	182,839	181,024
Revenue reserve	2,882	(197)	7,029
Shareholders' funds	220,875	231,007	236,418
Net asset value per share (note 5)	422.0p	439.7p	450.0p

Cash Flow Statement

for the six months ended 30th April 2015

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2015	30th April 2014	31st October 2014
	£'000	£'000	£'000
Net cash inflow/(outflow) from operating
activities (note 6)	1,477	(162)	5,606
Taxation
Overseas tax recovered	64	-	281
Net cash inflow from capital expenditure
and financial investment	4,033	6,140	1,699
Dividend paid (note 3)	(6,804)	(8,037)	(8,037)
Net cash outflow from financing	(559)	(1,055)	(1,055)
Decrease in cash for the period	(1,789)	(3,114)	(1,506)
Reconciliation of net cash flow to movement in net funds
Net cash movement	(1,789)	(3,114)	(1,506)
Exchange movements	38	(139)	127
Movement in net debt in the period	(1,751)	(3,253)	(1,379)
Net funds at the beginning of the period	2,248	3,627	3,627
Net funds at the end of the period	497	374	2,248
Represented by:
Cash and short term deposits	497	374	2,248
Net funds at the end of the period	497	374	2,248

Notes to the Financial Statements

for the six months ended 30th April 2015

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 2014 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 included 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 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' issued in January 2009.

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

The accounting policies applied to these half year financial statements are consistent with those applied in the financial statements for the year ended 31st October 2014.

3.   Dividend

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2015	30th April 2014	31st October 2014
	£'000	£'000	£'000
Final dividend paid in respect of the year ended
31st October 2014 of 13.0p (2013: 15.3p)	6,804	8,037	8,037

      No interim dividend has been declared in respect of the six months ended 30th April 2015 (2014: nil).

4.   Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2015	30th April 2014	31st October 2014
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return/(loss)	2,657	(197)	7,029
Capital loss	(10,837)	(92,444)	(94,259)
Total loss	(8,180)	(92,641)	(87,230)
Weighted average number of shares in issue	52,421,725	52,567,222	52,549,571
Revenue return/(loss) per share	5.07p	(0.37)p	13.38p
Capital loss per share	(20.67)p	(175.86)p	(179.37)p
Total loss per share	(15.60)p	(176.23)p	(165.99)p

5.   Net asset value per share

      Net asset value per share is based on the net assets attributable to shareholders £220,875,000 (30th April 2014: £231,007,000 and 31st October 2014: £236,418,000) and on the 52,337,112 (30th April 2014: 52,532,112 and 31st October 2014: 52,532,112) shares in issue at the period end.

6.   Reconciliation of net loss on ordinary activities before finance costs and taxation to net cash inflow/(outflow) from operating activities

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2015	30th April 2014	31st October 2014
	£'000	£'000	£'000
Net loss on ordinary activities before finance costs and taxation	(7,770)	(92,604)	(86,323)
Add back capital loss before finance costs and taxation	10,837	92,444	94,259
Net movements in debtors, accrued income and accrued
expenses	(404)	1,453	1,585
Overseas withholding tax	(387)	(37)	(1,275)
Management fee charged to capital	(799)	(1,418)	(2,640)
Net cash inflow/(outflow) from operating activities	1,477	(162)	5,606

JPMORGAN FUNDS LIMITED

ENDS

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

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

 

END

 

 

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