Final Results

RNS Number : 2557N

JPMorgan Russian Securities PLC

12 February 2009

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITES PLC

AUDITED FINAL RESULTS FOR THE YEAR ENDED 31ST OCTOBER 2008

Chairman's Statement

After five years of out-performance, the second half of the Company's financial year witnessed the worst market conditions for the Russian market since the loan default crisis of 1998. The Company's total return on net assets for the year to 31st October 2008 was -64.6%, compared to a return of -51.9% (in sterling terms) from the Company's Benchmark, the MSCI Russian 10/40 Equities Indices Index. There is obvious disappointment that the Company underperformed the benchmark after such stellar performance in past years. However, against a background of extreme volatility on the world's stock markets, your Board remains fully supportive of the Investment Managers and believes that their in-depth knowledge of the Russian market, fundamental research and trading discipline will provide the basis for future long term out-performance. The Investment Managers explain in detail the reasons behind this year's underperformance in their report in the Company's Annual report & Accounts.

Revenue and Earnings

Revenue gain after taxation for the year to 31st October 2008 was £529,000, representing a revenue gain per share of 0.95p. Although there is a positive contribution to revenue this year, the Company has a significant accumulated revenue deficit and therefore no dividend has been proposed.

Authority to Repurchase the Company's Shares

During the year under review the Company did not repurchase any shares. However the Board continues to believe that a facility to reduce discount volatility is important to have in place, and is therefore seeking approval from shareholders to renew the authority at the forthcoming Annual General Meeting.

Corporate Governance

The Company operates in accordance with corporate governance best practice. The Board has reviewed the investment management, secretarial and marketing services provided to the Company by JPMorgan Asset Management (UK) Limited. This annual review has included their performance record, management processes, investment style, resources and risk control mechanisms. Although investment performance was disappointing this year, the Board took into account the Company's outstanding performance over the preceding five years. Accordingly the Board was satisfied with the results of the review and therefore, in the opinion of the Directors, the continuing appointment of JPMAM for the provision of these services is the interests of shareholders as a whole.

Board of Directors

In accordance with the Company's Articles of Association the Audit Committee Chairman, Mr Paul Teleki, will be retiring by rotation at the forthcoming Annual General Meeting. Having been appointed during the year, Mr George Nianias will retire and seek election at the Annual General Meeting. A Nomination Committee of the Board, has met to consider the attributes and contribution of Mr Teleki and Mr Nianias to the Board's deliberations. Following this review, the Board recommends to shareholders that, taking into account their respective investment experience, understanding of the Russian market and contribution to the Board, both be re-elected.

Articles of Association

At the forthcoming Annual General Meeting, it is proposed that the Company adopts new Articles of Association in order to comply with the provisions of the Companies Act 2006 that have already been brought into effect. The new Act is being implemented in stages and some changes require alterations to the Company's Articles this year, while others will require further amendments in 2010.More details on the proposed changes to the Articles are given in the Directors' Report and Appendix to the Notice of Annual General Meeting in the Company's Report & Accounts. 

Annual General Meeting

The Company's sixth Annual General Meeting will be held on Friday 13th March 2009 at 12.00 noon., at Trinity House, Tower Hill, London, EC3N 4DH. In addition to the formal part of the meeting, there will be a presentation from the Investment Managers who will answer questions on the portfolio and performance. There will also be an opportunity to meet the Board, the Investment Managers and representatives of JPMorgan Asset Management. I look forward to seeing as many of you as possible at this meeting. Shareholders are asked to submit in writing any detailed or technical questions that they wish to raise at the AGM in advance to the Company Secretary at Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ. Alternatively you can lodge questions on the Company's website at jpmrussian.co.uk.

Outlook

In 2009 it is likely that we will see continued difficulties for the Russian market, mainly driven by economic slowdown and falling commodity prices. The triggers for a rebound in the Russian market are a return to global growth and a stabilisation of commodity prices. In the short term, however, the market is expected to remain volatile on the back of adverse financial market conditions, and further downgrades in consensus EPS expectations in the commodity sectors (oil in particular), in order to reflect lower commodity prices during 2009.

Despite these extremely testing times, the Russian stock market is the cheapest of the major emerging markets and the growing number of high quality businesses trading at distressed valuations makes the investment case for long term investors.

Pamela Idelson Smith

Chairman

12th February 2009

Investment Managers' Report

Market Review

When we wrote to shareholders twelve months ago we reported on another strong year for the Russian equity market and we were congratulating ourselves on the fact that Russia appeared to have avoided the effects of the global liquidity crunch. We noted that Russia would be exposed should natural resources suffer a significant slowdown in demand or if foreign investors should start to withdraw from the market. The carnage we have witnessed in global markets and especially in Russia has been difficult to comprehend and our muted notes of caution have been overwhelmed by the scale of the setback. 

We have more than 10 years of experience of investing in the Russian market and deeply regret that shareholders have seen their returns reduced so dramatically in the space of a few months. We believe there are five main reasons behind the sharp falls in the Russian equity market:

• Volatility in Oil and Commodity Prices

The price per barrel of oil at the start of our financial year last November was approximately $65. It rose steadily during the following nine months and peaked at a price of $146 per barrel in early July 2008. In the following three months it fell by more than 55% reaching a price of $65 per barrel by the end of October 2008. Global demand for commodities where Russia dominates, such as non-ferrous metals and gas, also fell sharply and these indices witnessed a decline of over 50% during 2008. Although the Russian market has tried over the past few years to decouple itself from the oil price, the reality is that a large proportion of Russia's wealth is related to oil. It is interesting to note that in the period from early July to the end of October the Russian equity market fell by almost the same percentage as the oil price.

• Lack of a Domestic Investor Base

In times of crisis, it is normal to see assets transferring from 'weak hands', i.e. leveraged short term speculators to 'strong hands', i.e. investors with long term horizons and a steady commitment to the market, usually represented by pension funds, corporate and the State. Domestic savings in Russia are still low in comparison to Western markets and this underdevelopment creates additional

risks for international investors as there are few domestic buyers to counterbalance overseas investors. In the event of massive global risk aversion and a sell off on all markets, countries with a dedicated domestic investor base have fared better than countries that lack such support. To resolve this issue going forward requires the Russian authorities to combat inflation and target real interest rates for depositors. Pension and banking reforms also need more real progress. The state, as the largest shareholder on the market, has to understand and implement better corporate governance standards, in particular regarding dividend policies and minority shareholder rights.

• Problems with Market Infrastructure

Russia has a rudimentary trading platform and settlement system. During a bull market, most market participants and regulators have been happy to ignore these facts and carry on with the status quo. However, this crisis has been a major test for investors' trust in the country's current market infrastructure and consequently, with a number of trading suspensions, investors trust faded fast. We have now seen a migration of almost all trading volumes in Russian equities from Moscow to the London and New York Stock Exchanges. This has drained liquidity from domestic companies who do not have access to an overseas quote and trading volumes have declined substantially for these stocks. Although it could be argued that investor trust has evaporated across all financial markets this year, it does not excuse the continuing issues for the Russian equity market and we hope that regulators in Moscow will act quickly to improve the situation in order to restore investor confidence in the domestic market.

• Access to Funding

The global liquidity crisis spread to Russia with a vengeance in 2008. Companies who previously were able to raise funding from both domestic and international banking sources found access denied and bond markets also shut. With cash flows from energy and commodities diminishing concurrently this has meant a squeeze on companies in Russia and development plans have been severely

curtailed in favour of surviving the crisis.

• Politics and Country Specific Risk Factors

Finally, we should comment on the political situation in Russia and its neighbours. The military operation in South Ossetia and Abkhazia in August had a negative impact on the perception of Russia's country risk. In addition, the recently approved extension of terms for the country's President and Parliament is disappointing, as the change reduces the ability of the Russian population to influence the political system. Furthermore this makes the process of modernisation for the Russian state even more rigid and dependent on the will and vision of single individuals. The recent disagreement between Russia and the Ukraine over gas tariffs and shipments to Europe is another indicator of how sensitive the political situation is at the moment. We believe that all these factors have a negative impact on the market.

Performance Review

The Company's benchmark fell by 51.9% over the Company's financial year to 31st October 2008. The Company's net asset value fell by more than the benchmark and returned -64.6% over the same period. Shareholders may recall that over the past few years the portfolio has been consistently underweight in the energy sector with corresponding overweight positions in privately owned companies in the materials, financials and consumer sectors. Our reasons for this have been our belief in liberal economic theory. The cornerstone of this theory is that the state is not an efficient owner or manager of business. Although the state can act as a last saviour for business, and nationalisation has been used widely over the years by several governments, it does not change the fact that state employees will have different motivations compared to entrepreneurs in managing business. This is why, when investing, we have a preference for private companies against those controlled by the state. During the last quarter of this reporting year the market punished us severely for this preference with a clear anticipation that during the liquidity crisis the Russian government would be principally concerned about state controlled companies and would extend its help to them on an exclusive basis. Share prices of most of Russia's privately owned companies moved to distressed levels and in particular Magnitogorsk (Steel),Magnit (Supermarket operator) and Sitronics (Telecommunications and IT) were the largest negative detractors from performance for us in the year.

One fundamental advantage of closed end funds, such as this Company, is the ability to borrow money to invest in the portfolio ('gearing'). Unfortunately, gearing utilised by the Company in the last quarter of the reporting period worked against us and in hindsight we were too exposed to the Russian market over the summer months of 2008. Following discussions with the Board of Directors in early September we removed gearing from the portfolio.

Outlook

Despite all the negative factors mentioned above, Russia continues to offer great opportunities for investors with a long term investment horizon. Valuations seen today have not been around since the crisis of 1998, following which investments made brought rich returns over the next 10 years. Russia still has vast supplies of physical assets that are required by countries and companies all over the world and a well educated workforce to ensure that Russian companies are positioned to take advantage of these opportunities. Russian consumers have begun to enjoy the goods and services that are available in an open economy and they will continue to demand improvements in their living standards. We believe that the Russian government recognises the need to ensure that private enterprise continues to flourish and will make available the funding and support to do so.

The global recession may well last for some time to come and Russia will have its share of problems arising from this. Your Managers remain confident that the portfolio of investments we have selected will do well over the months and years to come.

Oleg I. Biryulyov

Vitaly  N. Kazakov

Investment Managers 

12th February 2009

Principal Risks

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

These key risks fall broadly under the following categories: 

• Investment and Strategy: An inappropriate investment strategy, for example asset allocation or the level of gearing, may lead to underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider

discount to NAV. The Board manages these risks by diversification of investments through its investment restrictions and guidelines, which are monitored and reported on by the Manager. JPMAM provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses.

The Board monitors the implementation and results of the investment process with the investment managers, who attend all Board meetings, and reviews data which show statistical measures of the Company's risk profile. The investment managers employ the Company's gearing tactically, within a strategic range set by the Board.

• Market:Market risk arises from uncertainty about the future prices of the Company's investments. It represents the potential loss that the Company might suffer through holding investments in the face of negative market movements. The Board considers asset allocation, stock

selection and levels of gearing on a regular basis and has set investment restrictions and guidelines, which are monitored and reported on by JPMAM. The Board monitors the implementation and results of the investment process with the Manager.

• Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 842 of the Income and Corporation Taxes Act 1988 ('Section 842'). Details of the Company's approval are given under 'Business of the Company' above.

Were the Company to breach Section 842, it might lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. The Section 842 qualification criteria are continually monitored by JPMAM and the results

reported to the Board each month. The Company must also comply with the provisions of the Companies Act 1985 and 2006 and, as its shares are listed on the London Stock Exchange, the UKLA Listing Rules. A breach of the Companies Act 1985 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules could result in the Company's shares being suspended from  listing which in turn would breach Section 842. The Board relies on the services of its Company

Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Act 1985 and 2006 and the UKLA Listing Rules.

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

• Operational: Disruption to, or failure of, JPMAM's accounting, dealing or payments systems or the custodian's records could prevent accurate reporting and monitoring of the Company's financial position. Details of how the Board monitors the services provided

by JPMAM and its associates and the key elements designed to provide effective internal control are included within the Internal Control section of the Corporate Governance report.

• Financial: 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 19.

Related Parties Transactions

During the 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.

Directors' Responsibilities

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

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

b)     the Annual Report, to be published shortly, includes a fair review of the development and performance of the

  business and the position of the Company, together with a description of the principal risks and

  uncertainties that they face.

For and on behalf of the Board

Pamela Idelson Smith

Chairman

12th February 2009

Income Statement

for the year ended 31st October 2008 (audited)

			2008			2007
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) from investments held
At fair value through profit or loss		-	(256,143)	(256,143)	-	137,901	137,901
Net foreign currency gains/(losses)		-	(5,242)	(5,242)	-	1,786	1,786
Income from investments		9,482	-	9,482	7,311	-	7,311
Other interest receivable and similar income		150	-	150	158	-	158
Gross return/(loss)		9,632	(261,385)	(251,753)	7,469	139,687	147,156
Management fee		(6,007)	-	(6,007)	(5,063)	-	(5,063)
VAT recovered on management fee		636	-	636	-	-	-
Other administrative expenses		(900)	-	(900)	(903)	-	(903)
Net return/(loss) on ordinary activities
before finance costs and taxation		3,361	(261,385)	(258,024)	1,503	139,687	141,190
Finance costs		(1,581)	-	(1,581)	(1,259)	-	(1,259)
Net return/(loss) on ordinary activities
before taxation		1,780	(261,385)	(259,605)	244	139,687	139,931
Taxation		(1,251)	-	(1,251)	(983)	-	(983)
Net return/(loss) on ordinary activities
after taxation		529	(261,385)	(260,856)	(739)	139,687	138,948
Return/(loss) per share		0.95p	(467.32)p	(466.37)p	(1.32)p	249.63p	248.31p

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

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

Reconciliation of Movements in Shareholders' Funds
for the year ended 31st October 2008 (audited)

	Called up		Capital
	share	Other	redemption	Capital	Revenue
	capital	reserve	reserve	reserve	reserve	Total
	£’000	£’000	£’000	£’000	£’000	£’000
At 31st October 2006	560	52,813	41	213,227	(1,659)	264,982
Repurchase of shares for cancellation	(1)	(416)	1	–	–	(416)
Net return/(loss) from ordinary activities	–	–	–	139,687	(739)	138,948
At 31st October 2007	559	52,397	42	352,914	(2,398)	403,514
Net return/(loss) from ordinary activities	–	–	–	(261,385)	529	(260,856)
At 31st October 2008	559	52,397	42	91,529	(1,869)	142,658

Balance Sheet

as at 31st October 2008 (audited)

		2008	2007
		£'000	£'000
Fixed assets
Equity investments at fair value through profit or loss		132,743	424,128
Investment in liquidity fund at fair value through profit or loss		10,565	17,676
Total investment portfolio		143,308	441,804
Current assets
Debtors		5,627	2,784
Cash and short term deposits		177	17,553
		5,804	20,337
Creditors: amounts falling due within one year		(6,454)	(58,627)
Net current liabilities		(650)	(38,290)
Total assets less current liabilities		142,658	403,514
Capital and reserves
Called up share capital		559	559
Other reserve		52,397	52,397
Capital redemption reserve		42	42
Capital reserve		91,529	352,914
Revenue reserve		(1,869)	(2,398)
Shareholders' funds		142,658	403,514
Net asset value per share		255.1p	721.4p

Cash Flow Statement
for the year ended 31st October 2008 (audited)

		2008	2007
		£'000	£'000
Net cash inflow/(outflow) from operating activities		(2,811)	1,108
Returns on investments and servicing of finance
Interest paid		(1,722)	(1,134)
Capital expenditure and financial investment
Purchases of investments		(475,189)	(254,344)
Sales of investments		501,476	244,984
Other capital charges - handling fees		(189)	(182)
Net cash inflow/(outflow) from capital expenditure
and financial investment		26,098	(9,542)
Net cash inflow/(outflow) before financing		21,565	(9,568)
Financing
Net drawdown/(repayment) of loans		(40,275)	25,863
Repurchase of ordinary shares		-	(416)
Net cash inflow/(outflow) from financing		(40,275)	25,447
Increase/(decrease) in cash for the year		(18,710)	15,879

Notes to the Accounts

1. Accounting policies 

The accounts are prepared in accordance with the Companies Acts 1985 and 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' (the 'SORP') issued by the AIC in December 2005.

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

2. Return/(loss) per share

	(Audited) 31st October 2008	(Audited) 31st October 2007
	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return/(loss)	529	(739)
Capital return/(loss)	(261,385)	139,687
Total return/(loss)	(260,856)	138,948
Weighted average number of shares in issue	55,932,812	55,957,427
Revenue return/(loss) per ordinary share	0.95p	(1.32)p
Capital return/(loss) per ordinary share	(467.32)p	249.63p
Total return/(loss) per ordinary share	(466.37)p	248.31p

3. Net asset value per share

The net asset value per share is based on the net assets attributable to the ordinary shareholders of £142,658,000 (2007: £403,514,000) and on the 55,932,812 (2007: 55,932,812) shares in issue at the year end.

4. Status of preliminary announcement

The financial information set out in this preliminary announcement does not constitute the Company's statutory accounts for the years ended 31st October 2008 or 2007. The statutory accounts for the year ended 31st October 2008 have not been delivered to the Registrar of Companies, nor have the auditors yet reported on them. The statutory accounts for the year ended 31st October 2008 will be finalised on the basis of the information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the approval of the accounts by the Board of Directors. 

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

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

For further information please contact:

                 Alison Vincent

                 For and on behalf of

                 JPMorgan Asset Management (UK) Limited, Secretary

                 020 7742 6000

                       12th February 2009

 

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