Final Results

RNS Number : 8867A

JPMorgan Russian Securities PLC

08 February 2011

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST OCTOBER 2010

Chairman's Statement

I am pleased to be able to report that the Company delivered another year of excellent investment performance. Over the year to 31st October 2010, the net asset value total return rose by 46.3%, outperforming the MSCI Russian 10/40 Equity Indices Index (in Sterling terms), which rose by 27.5%. The return to shareholders was higher at 53.2%, reflecting a narrowing of the discount at which the Company's shares trade to the net asset value.

Our Investment Managers remain confident about the long-term prospects for the Russian market and have again been rewarded by maintaining their long-held underweight portfolio position in the energy sector, focussing instead on high quality consumer investments. A performance review and an outlook for the coming year, together with commentary on the issues and challenges facing the Company's investment portfolio, can be found in the Investment Managers' report below.

Revenue and Earnings

Dividends paid by Russian companies have improved from recent years, resulting in the Company generating a smaller revenue loss after taxation for the year to 31st October 2010 of £382,000 (2009: £2,299,000) representing a revenue loss per share of 0.69p (2009: 4.11p).

Authority to Repurchase and Issue Shares

During the year the Company repurchased 648,500 shares for cancellation at an average discount to net asset value of 10.9%. These buy backs were all implemented during the first half of the Company's financial year when the average discount of the share price to the net asset value was 9.9%. In the second half of the year under review, the discount narrowed from 9.4%, as at the half year end, to 6.3%. 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 regularly reviews the level of discount at which the Company will repurchase its shares for cancellation. The Board's stated policy is to consider utilising its buyback powers if the average discount exceeds 12% over a thirty day period.

The Company's authority to issue new shares and to dis-apply the pre-emption rights on any allotment expires this year, having been granted for a period of five years in 2006. Although the Company's shares rarely trade at a premium to net asset value, the Board feels that it is useful to have these powers in place, as any new issue of shares at a premium would enhance the Company's net asset value per share and therefore benefit existing shareholders. Accordingly authority to renew these powers, together with the power to repurchase shares, will be sought at the forthcoming Annual General Meeting.

The Board will only repurchase shares at a discount to their prevailing net asset value, and issue shares when they trade at a premium to their net asset value, so as not to prejudice existing shareholders.

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 ('JPMAM'). This annual review has included their performance record, resources and risk control mechanisms. The Board was satisfied with the results of the detailed review and therefore, in the opinion of the Directors, the continuing appointment of JPMAM for the provision of these services is in the interests of shareholders as a whole.

Board of Directors

In compliance with the new UK Corporate Governance Code, all Directors will be standing for re-election at the forthcoming Annual General Meeting. Further to this year's evaluations of the Directors, the Chairman, the Board and its Committees, the Board recommends to shareholders that, taking into account the Board's collective investment experience, knowledge of the Russian market and contribution to the Board's deliberations, all Directors be re-elected. Having been appointed during the year, Alexander Easton is required to seek election to the Board. It is also recommended that his appointment be supported.

Paul Teleki, the Audit Committee Chairman, retired from the Board in January 2011. I would like to thank Paul for his many years of service to the Company and wish him well for the future. Mr Nicholson has agreed to act as Chairman of the Audit Committee until a permanent replacement is appointed over the coming year. As part of its discussions regarding the composition of the Board, a phased programme of renewal to refresh the Board's membership has been agreed and two of the longer serving Directors will retire when it is deemed appropriate for them to do so, with the aim of maintaining Board continuity.

Annual General Meeting

The Company's eighth Annual General Meeting will be held on Friday 18th March 2011 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 JPMAM. 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 www.jpmrussian.co.uk.

Pamela Idelson Smith

Chairman

8th February 2011

Investment Managers' Report

Market Review

During the twelve months to 31st October 2010 the Russian market experienced a period of continued, but volatile, recovery. The Company's benchmark index, the MSCI Russian 10/40 Equity Indices Index rose by 27.5% in sterling terms over this period.

The performance of the Russian market can be split into distinct periods over the year under review: a rising market from November 2009 until May 2010; a sell off accompanied by high volatility from May to August 2010 and finally a renewed rise in the market from September 2010, which has continued into 2011. The rally from November 2009 was mainly driven by better than expected earnings results. May 2010 brought a renewal of macro-economic worries and, in particular, problems in peripheral parts of the European Union over sovereign debt, resulting in a reality check for markets across the globe. From September 2009, following the commitment of governments to use quantitative easing as a tool to revive economic growth, markets moved upwards especially in nominal terms, supported by currency devaluation and the revival of inflation.

Performance

Over the twelve months ended 31st October 2010, the Company's net asset value total return was 46.3%, outperforming the benchmark index by 18.8 percentage points. The total return to shareholders was even greater, returning 53.2% over the year. We are very pleased that we have been able to deliver another year of strong performance, which has rewarded our fundamental views and minimal trading activity.

The Company benefited from stock selection and the long-standing asset allocation decision of taking overweight positions in consumer related names and maintaining an underweight position in the energy sector. The difference in performance between our largest positive (Magnit) and negative (Gazprom) active positions was an impressive 112% in sterling terms during the review period.

Gazprom suffered over the reporting period for a number of reasons including, a fall in production, massive technological and financial challenges related to the development of new vast deposits and disputes with transit countries and customers about prices and volumes. Furthermore the rapid development of economically viable supplies of shale gas in the USA was a ground-shaking event in the global gas industry. The discovery resulted in the world's largest economy changing from being a net importer of gas to becoming self sufficient and perhaps even a net exporter of gas over the long run, thus threatening Gazprom's dominance as a supplier to the EU. All in all, Gazprom finished the review period among a minority of Russian stocks whose share price was lower than at the close of the previous year.

Magnit, in contrast, performed well over the review period due to its outstanding operational results. This company delivered and outperformed most of its ambitious targets on network rollout, sales growth and margin enhancement. It also continued to act in an exemplary manner in terms of its openness to shareholders through the consistency of corporate communications and investors relationships. This stock is held in the portfolio as it represents a strategically interesting play within the consumer sector and it has very significant growth opportunities for at least several decades.

The other main contributors to relative performance included an underweight position in oil and gas company, Lukoil Holdings, along with off-benchmark positions in Cherkizovo Group, a meat production and processing company, CTC Media Group, a leading television network in Russia and Dixy Group, a food retail chain. A number of stocks that we did not hold underperformed against the benchmark index and the portfolio benefited from their exclusion; such stocks include Rosneft, an oil and gas company and Polyus Gold, a leading gold producer in Russia.

The largest detractors from the Company's relative performance came from strong performing stocks that are in the Company's benchmark but which were not held in the portfolio. Examples include Novatek, a natural gas producer, and Rushydro, a hydro electric power generating company.

Country Specific Risk Factors

The slow implementation of reforms in Russia continues to disappoint. It is, however, pleasing that a number of foundations for the long-term structural reform of state finance and budget execution and control have now been put in place. We expect that such reforms will become more visible in 2011-2015 under the stewardship of Mr Kudrin, the Russian Finance Minister, who has been recognised by some commentators as the best minister of finance among the G20 countries, for developing and legislating reforms based on best practice. 1

Progress is even slower with respect to the fight against corruption and monopoly exploitation. Furthermore the gap between the expectations of society and the quality of services provided to the general public by state agencies continues to widen. This year, in particular, real life was very different to the state-controlled illusion produced by mass media; be it the experience of summer fires, disruptive construction projects, road and traffic problems or public demonstrations. The necessity for reform is now well understood as a basic requirement for preserving stability in Russia.

Portfolio Activity

Last year was quite typical for us in terms of our portfolio activity. We are strong believers in the strategy of 'buy and hold', and investors should expect to see fairly limited turnover within the portfolio going forward. We do implement some adjustments in response to price movements and following the introduction of new holdings. Although there has been a marked increase in the number of new companies coming to the market over the last year, we maintain a very selective approach to new listings, which also made a significant positive contribution to this year's performance. In our ongoing stock selection process we will continue to focus upon the quality of the business, management and balance sheets.

Outlook

We expect 2011 to continue to be volatile for investors. Most of the global and Russian economic imbalances have not been resolved, and the quick recovery stage has now been completed, leaving the economy with the same old collection of problems and issues to deal with. In addition there are now budget constraints which in turn will lead to higher taxes and tighter regulation. 2011 is also a pre-election year, and it is therefore very likely that politics will dominate the front pages.

However there are positives that we can highlight. Larger emerging economies, like Russia, underperformed their smaller counterparts in 2010 and therefore Russia offers significant value which we believe is being underappreciated by the market. Furthermore government-sponsored incentive schemes and re-hiring in the infrastructure sector are beginning to work through the Russian economy giving us a positive growth outlook. Wages and consumption are also rising which, despite now higher valuations, supports our positive view on sectors exposed to domestic growth. On balance we continue to believe that the Russian market provides a reasonably attractive risk return profile for long-term investors.

1 Euromoney Institutional Investor plc, October 2010

 Oleg Biryulyov

Vitaly Kazakov

Investment Managers

8th February 2011

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 Underperformance: An inappropriate investment strategy, for example asset allocation, the level of gearing or the degree of portfolio risk, could lead to underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. The Board manages these risks by diversification of investments and through a set of investment restrictions and guidelines which are monitored and reported on by the Manager. JPMorgan Asset Management (UK) Limited ('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 Manager, who attends all Board meetings, and reviews data which show statistical measures of the Company's risk profile.

•   Political and Economic: Administrative risks, such as the imposition of restrictions on the free movement of capital.

•   Loss of Investment Team or Investment Manager: A sudden departure of the investment manager or several members of the investment management team could result in a short-term deterioration in investment performance. The Manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team based approach, as well as special efforts to retain key personnel.

•   Discount: A disproportionate widening of the discount relative to the Company's peers could result in loss of value for shareholders. The Board regularly discusses discount policy - please refer to the Chairman's Statement for details on the Board's proposed changes to its discount control policies.

•   Change of Corporate Control of the Manager: The Board holds regular meetings with senior representatives of JPMAM in order to obtain assurance that the Manager continues to demonstrate a high degree of commitment to its investment trusts business through the provision of significant resources.

•   Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 1158 of the Income and Corporation Tax Act 2010 ('Section 1158'). Details of the Company's approval are given under "Business of the Company" above. Were the Company to breach Section 1158, 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 1158 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 2006 and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules. A breach of the Companies Act 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 1158. The Board relies on the services of its Company Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Act 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 section of the annual 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 and credit risk. Further details are disclosed in note 19 of the Annual Report.

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 year.

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

8th February 2011

Income Statement

for the year ended 31st October 2010

				2010			2009
				Revenue	Capital	Total	Revenue	Capital	Total
			Note	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at
fair value through profit or loss				-	119,491	119,491	-	119,124	119,124
Net foreign currency gains				-	73	73	-	554	554
Income from investments				6,033	-	6,033	885	-	885
Other interest receivable and similar income				1	-	1	65	-	65
Gross return				6,034	119,564	125,598	950	119,678	120,628
Management fee				(4,828)	-	(4,828)	(2,391)	-	(2,391)
Other administrative expenses				(770)	-	(770)	(719)	-	(719)
Net return/(loss) on ordinary activities
before  finance costs and taxation				436	119,564	120,000	(2,160)	119,678	117,518
Finance costs				(1)	-	(1)	(69)	-	(69)
Net return/(loss) on ordinary activities
before  taxation				435	119,564	119,999	(2,229)	119,678	117,449
Taxation				(817)	-	(817)	(70)	-	(70)
Net return/(loss) on ordinary activities
after taxation				(382)	119,564	119,182	(2,299)	119,678	117,379
Return/(loss) per share			2	(0.69)p	215.74p	215.05p	(4.11)p	213.97p	209.86p

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

	Called up		Capital
	share	Other	redemption	Capital	Revenue
	capital	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st October 2008	559	52,397	42	91,529	(1,869)	142,658
Net return/(loss) on ordinary activities	-	-	-	119,678	(2,299)	117,379
At 31st October 2009	559	52,397	42	211,207	(4,168)	260,037
Repurchase of the Company's own shares for cancellation	(6)	(3,116)	6	-	-	(3,116)
Net return/(loss) on ordinary activities	-	-	-	119,564	(382)	119,182
At 31st October 2010	553	49,281	48	330,771	(4,550)	376,103

Balance Sheet

at 31st October 2010

		2010	2009
	Note	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		364,854	261,277
Investment in liquidity fund held at fair value through profit or loss		6,395	431
Total investment portfolio		371,249	261,708
Current assets
Debtors		1,986	3,207
Cash and short term deposits		2,998	16
		4,984	3,223
Creditors: amounts falling due within one year		(130)	(4,894)
Net current assets/(liabilities)		4,854	(1,671)
Total assets less current liabilities		376,103	260,037
Capital and reserves
Called up share capital		553	559
Other reserve		49,281	52,397
Capital redemption reserve		48	42
Capital reserves		330,771	211,207
Revenue reserve		(4,550)	(4,168)
Shareholders' funds		376,103	260,037
Net asset value per share	3	680.3p	464.9p

Cash Flow Statement

for the year ended 31st October 2010

		2010	2009
		£'000	£'000
Net cash (outflow)/inflow from operating activities		(1,769)	2,761
Returns on investments and servicing of finance
Interest paid		(1)	(69)
Capital expenditure and financial investment
Purchases of investments		(174,458)	(178,573)
Sales of investments		182,635	175,534
Other capital charges		(382)	(368)
Net cash inflow/(outflow) from capital expenditure
and financial investment		7,795	(3,407)
Net cash inflow/(outflow) before financing		6,025	(715)
Financing
Repurchase of the Company's own shares for cancellation		(3,116)	-
Net drawdown of loans		-	25
Net cash (outflow)/inflow from financing		(3,116)	25
Increase/(decrease) in cash for the year		2,909	(690)

Notes to the Accounts

for the year ended 31st October 2010

1. Accounting Policies

The accounts are prepared in accordance with the Companies Act 2006, 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 'SORP') issued by the AIC in January 2009. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments at fair value.

2. Return/(loss) per share

The revenue loss per share is based on the revenue loss attributable to the ordinary shares of £382,000 (2009: £2,299,000 loss) and on the weighted average number of shares in issue during the year of 55,419,350 (2009: 55,932,812).

The capital return per share is based on the capital return attributable to the ordinary shares of £119,564,000 (2009: £119,678,000 return) and on the weighted average number of shares in issue during the year of 55,419,350 (2009: 55,932,812).

The total return per share is based on the total return attributable to the ordinary shares of £119,182,000 (2009: £117,379,000 return) and on the weighted average number of shares in issue during the year of 55,419,350 (2009: 55,932,812).

3. Net asset value per share

The net asset value per share is based on the net assets attributable to the ordinary shareholders of £376,103,000 (2009: £260,037,000) and on the 55,284,312 (2009: 55,932,812) shares in issue at the year end.

 4. Status of announcement

2009 Financial Information

The figures and financial information for 2009 are extracted from the published Annual Report and Accounts for the year ended 31st October 2009 and do not constitute the statutory accounts for that year.  The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2010 Financial Information

The figures and financial information for 2010 are extracted from the Annual Report and Accounts for the year ended 31st October 2010 and do not constitute the statutory accounts for the year.  The Annual Report and Accounts includes the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

Annual Report and Accounts

The Annual Report and Accounts will be posted to shareholders on or around 14th February 2011 and will shortly be available on the Company's website (www.jpmrussian.co.uk ) or in hard copy format from the Company's Registered Office, Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ. 

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

8th February 2011

- ENDS -

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.

 

END

 

 

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