15 Jun 2017 15:52
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN RUSSIAN SECURITIES PLC
UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED30TH APRIL 2017
Legal Entity Identifier: |
549300II3MHI98ZLVH37 Information disclosed in accordance with DTR 4.2.2 |
CHAIRMAN'S STATEMENT
Performance
The Russian equity market rose more modestly over the six month period to the end of April 2017 compared with the dramatic increase which occurred over the company's previous financial year to the end of October 2016.
The Company's net asset value on a total return basis increased 6.1% and the Company's return to shareholders on a total return basis was positive 5.9% over the period. This was slightly behind our new benchmark which you will remember from my Statement in the last Annual Report is now the RTS index. This index returned 7.0% on a total return basis, so performance was 0.9% behind the index. The Company's discount to net asset value has remained disappointingly wide and was slightly higher at the end of the period at 16.8% (end of last financial year 16.4%). However this is not very surprising given the continuation of sanctions against Russia and political tensions that persist between Russia and many other major nations.
The relationship between the newly elected government of U.S. President Trump and its Russian counterparts is generating some controversy and it is difficult to interpret how this may develop and what the economic outcomes may be. Compounding this uncertainty is the rising tension in Syria and the extent to which this could escalate and give rise to further economic sanctions against Russia. The investment manager comments further in his report on the economic and political impacts on the Russian market. JPMorgan Asset Management's compliance function monitors the Company's investments and provides assurances of compliance with the current sanctions regime.
At the Company's Annual General Meeting in March 2017, the shareholders approved the Board's recommendation to continue as an investment trust for a further five years until 2022. As referred to in my Chairman's Statement for the Company's Annual Report and Accounts to 31st October 2016, if the next continuation vote in 2022 is approved, the Board has committed to making a tender offer to shareholders for up to 20% of the outstanding share capital at NAV less costs and less a discount of 2% if, over the five years from 1st November 2016, the Company's net asset value total return in sterling on a cum income basis is below the total return of the benchmark in sterling terms.
Discount Control
The board's objective is to use its share purchase authority to assist in managing imbalances between the supply and demand for the Company's shares where this is in the long term interests of shareholders.
During the period the discount ranged between 11.2% and 17.7%. The Board's Discount Policy is to consider the buyback of shares when the Company's discount is above 10%, taking into account the absolute level of the Company's discount and the relative level of discount amongst peers in emerging markets.
After regular and careful consideration of the policy, the Board refrained from buying back shares in the period under review. The Board considered that the uncertainty surrounding Russia's economic and geopolitical situation, together with the high average discounts for emerging market investments, meant that buybacks would be ineffective in providing any meaningful narrowing of the Company's discount, other than possibly a very short term effect. The Board will continue to monitor the discount closely and, if the Russian market stabilises and becomes less affected by the geopolitical tensions, it will give further consideration to buying back shares should the wide discount persist.
Revenue, Earnings and Dividend
Revenue for the six month period to 30th April 2017 after taxation was £1,460,000 (2016: £924,000) and the return per share, calculated on the basis of the average number of shares in issue was 2.79 pence (2016: 1.77 pence) per share.
The Board has noted that more than three quarters of the Company's dividend income is received between the months of July and October. The Board considers that it would be appropriate to distribute the large majority of this income to shareholders by way of interim dividend payable in October rather than retaining this for later distribution. The Company's interim dividend, which is expected to be considered by the Board for declaration in September 2017, is therefore 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 AGM for payment in March. The Board expects to comment further on this evolution of dividend policy following consideration of the interim dividend in September.
Investment Manager
Oleg Biryulyov continues to be the Company's Investment Manager supported by JPMorgan Asset Management's Investment Management Team. The Investment Management team is part of JPMorgan Asset Management's Emerging Markets and Asia Pacific Equities team (EMAP) and consists of approximately 100 investment professionals. The Board recognise that there is a growing trend towards passive investment, whether in tracker or exchange traded funds. However they continue to believe that active management by a highly experienced investment manager, supported by a strong team, can deliver better returns for shareholders over the longer term.
Outlook
The Investment Manager has maintained his consistent approach of investing in well managed companies with strong balance sheets. He continues 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, inflation or the value of the rouble. The price of oil is a major determining factor for the Russian economy and, again, the outlook appears to be relatively stable in comparison to the extreme variations in price experienced in recent years. However, the potential for volatility in the price of oil is a constant factor. In addition, the possibility of a sudden geopolitical event causing an escalation of tension with the international community remains. The relatively high level of risk associated with investment in Russia continues.
Gill Nott
Chairman 15th June 2017
INVESTMENT MANAGER'S REPORT
Market Backdrop and Performance
The six months under review were dominated by Donald Trump's election as US President, OPEC's self-imposed production cuts, and a long-awaited rate hike from the US Federal Reserve. The oil price was on average above USD50/bbl for Brent Crude, but volatility continued. The rouble appreciated as the oil price rose and as the Central Bank of Russia moved the reference rate down by 75 basis points. Russian equities were up slightly for the period, although volumes were still below historic peaks. January 2017 saw the first wave of initial and secondary public offering activity, while the equity market injected USD 2.2 billion of fresh capital into the market during the period.
In the six-month period, the fund's new benchmark, the RTS Index, moved up 7.0% in sterling terms. The total return on net assets was 6.1%, underperforming the benchmark by 0.9%. A slight increase in the discount meant shareholder returns were moderately lower than this.
Economic and Political Events
The election of Trump as US president was initially met with a broadly positive response from the markets, which rose at the end of 2016. However, a divergence soon emerged between the reforms he had promised during his campaign and his ability to deliver them as an elected president. There was no quick resolution to Russian sanctions. Meanwhile, the US bombing in Syria left US-Russian relations at their lowest point in recent history. The relationship will take time and effort to rebuild, with consensus suggesting that Trump's election will make this process longer than previously anticipated.
The rise in populism in some EU counties and the political uncertainty that generated seems to have subsided to some degree following the recent election result in France and positive regional state elections for Chancellor Merkel in Germany. How these developments affect the EU's stance on continuing economic sanctions against Russia and the conflict in Syria remains to be seen.
Higher risks in other areas deflected attention away from Ukraine, but brought no resolution to the crisis afflicting the country. While the conflict lessened in intensity, its negative impact remains high, and we do not anticipate a quick solution.
The Russian government worked with OPEC and supported its self-imposed cuts to production. It will be interesting to see how sustainable this policy proves. The budget deficit continues to improve, on the back of better earnings, stronger commodity prices and a broad recovery in economic growth.
The Central Bank of Russia (CBR) and the Ministry of Finance continue to argue about the strength of the rouble. Interest rate cuts were supported by lower inflation year to date, but from now on, the CBR is likely to be slower and more cautious in its approach.
Foreign exchange (FX) interventions became the latest fine-tuning policy instrument for the CBR. General policy turned to smoothing FX volatility to extend the benefits of a stronger-than-expected currency and continue to bring down inflation.
On the domestic front, the political backdrop was punctuated by small-scale street protests and the emergence of unfavourable new data on corruption. We do not anticipate any major personnel changes to the leadership, nor to the direction of current policy. The Kremlin has been actively ignoring the opposition leader Alexei Navalny and his supporters, and continues to take little action against loyal bureaucrats, sending a powerful message to the public about its priorities.
The earnings season so far and the earnings outlook have been steadily improving, leaving market valuations looking attractive. With the dividends season just around the corner, we anticipate further demands by the Russian government from Gazprom and other State-controlled companies to make increased dividend payouts. The current dividend yield already makes Russia very attractive from an income point of view, and the increasing prevalence of higher payouts could give a major boost to the investment multiple of the market.
Performance
The major detractors over the period were:
Transneft - While we do not hold the stock due to its very poor corporate governance story, this means we sometimes miss out when investor optimism pushes up the price. We believe the index weighting is too big for the stock's current liquidity and free float and will not invest until we see evidence of significant restructuring.
MTS - Our decision not to invest in this name in the first part of its recovery last year weighed on performance. However, our ability to wait paid off this reporting period, when the stock was hit by fresh problems at Systema, its parent holding company, it fell back again.
Magnit - With hindsight, our decision to close down our underweight holding in the fourth quarter of 2016 was premature. Negative trends in like-for-like sales and a slowdown in growth continued through the first quarter of 2017. Magnit became a classic "fallen angel": its investment multiple de-rated very significantly, converting it into a "cheap" consumer name with a good 3%+ dividend yield. We believe that restructuring and economic recovery will pull this name up significantly in the future. As one of the best corporate stories on the market, Magnit represents a good long-term opportunity for investors.
Ros Agro - The Company's holding in this classic cyclical name saw its outstanding performance dampened by a period of weakness. We anticipate significant upside coming from investment projects of this company in the Far East and see price weakness as a temporary overreaction of the market to the lower commodity price outlook. Ros Agro is a quality name with strong management and should be a long-term holding for us.
Aeroflot - The Company does not hold this stock even though management has done a great job of consolidating market share and cutting costs, the stock now looks relatively expensive and therefore, is not an attractive proposition for acquisition.
Positive contributors included:
Lukoil - The valuation and dividend make the outlook for the Company's holding in this name more attractive than the market has recognised. We gradually closed our underweight position in the period in a tactic that paid off during the review period.
Tatneft - This minor oil player has been steadily delivering on its production and dividend targets. The Company's holding in this stock is very liquid, it is reasonably priced and represents an attractive position for us. A re-rating of the investment multiple helped to move the share price up.
Polymetal - This new name in our portfolio offers a reasonable investment multiple for a well-run mining business with a good track record of dividends, and we rate its management team highly.
TBC Bank - Our holding in this stock-the largest bank in Georgia-is a result of the Company's ability to invest in companies operating in the former Soviet Union Republics. TBC Bank is attractively valued and has a very strong management team.
Nostrum - The Company's holding in this junior natural gas producer in Kazakhstan is another example of diversification into former Soviet Union Republics. In addition to its attractive valuation, Nostrum has the opportunity to expand production and revenue in the next couple of years. We like its management team.
The company has an active position of 50% against its index. The notable increase in different positioning relative to the index can potentially create a significant deviation from the performance of the benchmark over both monthly and quarterly periods.
Portfolio Activity
In the review period, we sold out our position in M-Video prior to the buyout offer. This company had a major change of ownership and we are not certain that the new strategic shareholder will take such a friendly approach to minority investors.
We reinvested proceeds from these sales in Polymetal/Gazprom/LSR and Lukoil.
During the review period, a new listing came via the IPO of Detsky Mir, a retailer of children's clothing and toys. While we did not like the valuation, we liked the story itself. We will monitor the stock and add it to our portfolio if the valuation becomes more attractive.
Outlook
The valuation story has recently been supported by dividends and some recovery both in commodities and the rouble. There are no changes to the long-term story for Russian equities. The country's risk profile has been volatile and unpredictable, but returns have been reasonably good for portfolio investors. We would welcome new issuance and better market diversification, but we are under no illusions that this will happen quickly.
We believe that the chance of sanctions being lifted in 2017 is still less than half, but it is higher now than it was six months ago.
We expect positive earnings revisions to continue into the second and third quarters of 2017, providing ongoing support to the Russian equity market.
Oleg I. Biryulyov
Investment Manager 15th June 2017
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 2016.
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 2017 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 15th June 2017
STATEMENT OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED 30TH APRIL 2017
| (Unaudited) | (Unaudited) | (Audited) | |||||||
| Six months ended | Six months ended | Year ended | |||||||
| 30th April 2017 | 30th April 2016 | 31st October 2016 | |||||||
| 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 | - | 17,281 | 17,281 | - | 30,041 | 30,041 | - | 94,420 | 94,420 |
|
Net foreign currency (losses)/gains | - | (58) | (58) | - | 356 | 356 | - | 1,166 | 1,166 |
|
Income from investments | 2,519 | - | 2,519 | 1,774 | - | 1,774 | 11,087 | - | 11,087 |
|
Interest receivable and similar |
|
|
|
|
|
|
|
|
|
|
income | 8 | - | 8 | 11 | - | 11 | 22 | - | 22 |
|
Gross return | 2,527 | 17,223 | 19,750 | 1,785 | 30,397 | 32,182 | 11,109 | 95,586 | 106,695 |
|
Management fee | (305) | (1,219) | (1,524) | (198) | (790) | (988) | (435) | (1,739) | (2,174) |
|
Other administrative expenses | (365) | - | (365) | (361) | - | (361) | (913) | - | (913) |
|
Net return on ordinary activities |
|
|
|
|
|
|
|
|
|
|
before taxation | 1,857 | 16,004 | 17,861 | 1,226 | 29,607 | 30,833 | 9,761 | 93,847 | 103,608 |
|
Taxation | (397) | 237 | (160) | (302) | 158 | (144) | (1,665) | 348 | (1,317) |
|
Net return on ordinary activities |
|
|
|
|
|
|
|
|
|
|
after taxation | 1,460 | 16,241 | 17,701 | 924 | 29,765 | 30,689 | 8,096 | 94,195 | 102,291 |
|
Return per share (note 4) | 2.79p | 31.03p | 33.82p | 1.77p | 56.87p | 58.64p | 15.47p | 179.98p | 195.45p |
|
STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED 30TH APRIL 2017
| 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 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 | - | - | - | - | (4,187) | (4,187) |
At 30th April 2017 | 524 | 77 | 47,204 | 246,778 | 3,825 | 298,408 |
Six months ended 30th April 2016 (Unaudited) |
|
|
|
|
|
|
At 31st October 2015 | 524 | 77 | 47,204 | 136,342 | 10,493 | 194,640 |
Net return on ordinary activities | - | - | - | 29,765 | 924 | 30,689 |
Dividends paid in the period | - | - | - | - | (8,897) | (8,897) |
At 30th April 2016 | 524 | 77 | 47,204 | 166,107 | 2,520 | 216,432 |
Year ended 31st October 2016 (Audited) |
|
|
|
|
|
|
At 31st October 2015 | 524 | 77 | 47,204 | 136,342 | 10,493 | 194,640 |
Net return on ordinary activities | - | - | - | 94,195 | 8,096 | 102,291 |
Dividends paid in the year | - | - | - | - | (12,037) | (12,037) |
At 31st October 2016 | 524 | 77 | 47,204 | 230,537 | 6,552 | 284,894 |
1 These reserves form the 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 2017
| (Unaudited) | (Unaudited) | (Audited) |
| 30th April 2017 | 30th April 2016 | 31st October 2016 |
| £'000 | £'000 | £'000 |
Fixed assets |
|
|
|
Investments held at fair value through profit or loss | 297,491 | 211,756 | 279,865 |
Current assets |
|
|
|
Debtors | 377 | 3,266 | 494 |
Cash and cash equivalents | 3,020 | 2,554 | 5,150 |
| 3,397 | 5,820 | 5,644 |
Current liabilities |
|
|
|
Creditors: amounts falling due within one year | (2,480) | (1,144) | (615) |
Net current assets | 917 | 4,676 | 5,029 |
Total assets less current liabilities | 298,408 | 216,432 | 284,894 |
Net assets | 298,408 | 216,432 | 284,894 |
Capital and reserves |
|
|
|
Called up share capital | 524 | 524 | 524 |
Capital redemption reserve | 77 | 77 | 77 |
Other reserve | 47,204 | 47,204 | 47,204 |
Capital reserves | 246,778 | 166,107 | 230,537 |
Revenue reserve | 3,825 | 2,520 | 6,552 |
Total shareholders' funds | 298,408 | 216,432 | 284,894 |
Net asset value per share (note 5) | 570.2p | 413.5p | 544.3p |
NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 30TH APRIL 2017
1. Financial statements
The information contained within the financial statements in the 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 2016 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 January 2017.
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 2017.
The Company has elected not to prepare a statement of cash flows for the current period on the basis that substantially all of its investments are liquid and carried at market value.
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 2016.
3. Dividends paid
| (Unaudited) | (Unaudited) | (Audited) |
| Six months ended | Six months ended | Year ended |
| 30th April 2017 | 30th April 2016 | 31st October 2016 |
| £'000 | £'000 | £'000 |
Final dividend paid in respect of the year ended |
|
|
|
31st October 2016 of 8.0p (2015: 13.0p) | 4,187 | 6,804 | 6,804 |
2015 special dividend of 4.0p (2014: nil) | - | 2,093 | 2,093 |
2016 interim dividend of 6.0p (2015: nil) | - | - | 3,140 |
Total dividends paid in the period/year | 4,187 | 8,897 | 12,037 |
All dividends paid in the period/year have been funded from the revenue reserve.
The 2017 interim dividend is expected to be payable in October 2017.
4. Return per share
| (Unaudited) | (Unaudited) | (Audited) |
| Six months ended | Six months ended | Year ended |
| 30th April 2017 | 30th April 2016 | 31st October 2016 |
| £'000 | £'000 | £'000 |
Return per share is based on the following: |
|
|
|
Revenue return | 1,460 | 924 | 8,096 |
Capital return | 16,241 | 29,675 | 94,195 |
Total return | 17,701 | 30,689 | 102,291 |
Weighted average number of shares in issue | 52,337,112 | 52,337,112 | 52,337,112 |
Revenue return per share | 2.79p | 1.77p | 15.47p |
Capital return per share | 31.03p | 56.87p | 179.98p |
Total return per share | 33.82p | 58.64p | 195.45p |
5. Net asset value per share
| (Unaudited) | (Unaudited) | (Audited) |
| Six months ended | Six months ended | Year ended |
| 30th April 2017 | 30th April 2016 | 31st October 2016 |
Net assets (£'000) | 298,408 | 216,432 | 284,894 |
Number of shares in issue | 52,337,112 | 52,337,112 | 52,337,112 |
Net asset value per share | 570.2p | 413.5p | 544.3p |
JPMORGAN FUNDS LIMITED
15th June 2017
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 Report 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.