Half Year Results

RNS Number : 7800A

JPMorgan Russian Securities PLC

09 June 2016

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN RUSSIAN SECURITIES PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
30TH APRIL 2016

Chairman's Statement

Performance

It is pleasing to be able to report positive performance of the Company over the half year under review to 30th April 2016. This reflected the significant improvements in some areas of the Russian market.

The Company's net asset value on a total return basis was a positive 17.3% and the Company's return to shareholders on a total return basis was positive 16.9% over the period. The Company's discount to net asset value experienced little change and ended the period at 14.8%. The Company's performance in terms of return to shareholders on a total return basis was 1% below the benchmark, which ended the reporting period up 17.9%.

In comparison to the previous year, the markets in the current period were relatively calm, which is almost certainly attributable to the increasing oil price. The higher oil price also led to a significant upward movement in the Russian stock market and strengthening of the ruble, demonstrating how closely the Russian stock market is linked to the oil price. There have also been no significant changes in the US/EU relations with Russia although economic sanctions continue. However, the breaking of economic ties with Turkey in late 2015 could have a material negative impact on the Russian economy over a prolonged period.

At the Company's AGM in March 2016 the shareholders approved the Board's recommendation to widen the Company's investment objective. This now allows the Company to invest 10% of its gross assets in companies that operate or are located in former Soviet Union republics. During the period three new investments were made in interesting companies in this region (see more details in the Investment Manager's Report). Following these investments the percentage of the fund invested in this region is 2.8%.

Discount Control

The Board's objective remains to use the share repurchase authority to assist in managing any imbalance between supply and demand for the Company's shares, thereby reducing the volatility of the discount.

During the period the discount ranged from 18.6% to 12.6%. The Board decided to review the Company's discount control policy in light of the recent high market volatility. It concluded that buybacks of shares should be considered when the Company's discount was above 10% (previously 8%) and the absolute level of the Company's discount should be taken into account, together with the relative level of discount amongst peers in emerging markets.

Applying this revised policy to the current reporting period, the Board refrained from buying back shares as the average discount for emerging market investment trusts was increasing and it was concluded that buybacks would be ineffective against a rising trend of widening discounts.

Revenue and Earnings

The significant decline in investment income in the first half of the year to 31st October 2016 was expected following an exceptional year of dividend income in 2015. Most of the Company's income usually arises in the second half of the year and therefore the Company will not consider the level of dividend distribution to shareholders until after the year end.

Board of Directors

Following Lysander Tennant's planned retirement as a Director at the Company's AGM in March 2016, the Company has engaged the services of an independent non-executive search consultancy to identify a suitably qualified director to join the Board.

Investment Managers

Sonal Tanna has transferred into J.P.Morgan's Global Fund team and so is no longer involved as an Investment Manager of the Company. Oleg Biryulyov will remain as the lead Investment Manager and will continue to be supported by a team of portfolio managers in the Global Emerging Markets Group.

Outlook

As already mentioned above the price of oil is a major determining factor for the Russian economy and if recent increases continue it seems likely that it will have a positive economic impact on the Russian economy and the stock market in the second half of the Company's financial year.

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 if the right stocks are selected.

However, economic sanctions against Russia remain and the political outlook is uncertain in both the middle-East, USA and Europe. These significant geopolitical and economic issues will continue to impact the Russian market, together with concerns regarding the state of the domestic economy. Thus, the outlook remains uncertain but with some potential for upside if the oil price continues to strengthen.

Gill Nott

Chairman

9th June 2016

Investment Manager's Report

Market backdrop and performance

The six months under review were dominated by oil price moves and the impact on market prices of the wide variations in risk tolerance displayed by investors over the period. The oil price rose 4% in GBP terms over the period; however, this performance masks a 70%+ rally in prices of Brent crude oil between 11th February 2016 and the end of April 2016. This was such a powerful move that the MSCI Russia 10/40 index moved up by 36.3% and the ruble by almost 20% over the same period. For the review period as a whole, the MSCI Russian 10/40 Equity Index gained 17.9%.

The total return on net assets was 17.3%, underperforming the benchmark by 0.6%. The total return to shareholders increased to 16.9%, with the discount widening, as is usual in periods of heightened volatility.

Economic and political events

US and European sanctions imposed following Russia's involvement in Ukraine and the annexation of Crimea remain in place. There have been few new developments in the situation, and while there is hope of change, there is a lack of political will. Meanwhile, relations between Russia and Turkey deteriorated over the period following the shooting down of a Russian fighter jet by Turkey in November 2015, with Russia introducing economic sanctions against Turkey. Given the characteristics of the national leaders involved, we do not expect a quick resolution.

On the domestic front, the Central Bank of Russia has been very cautious, delaying further interest rates cuts until there is a significant drop in the inflation run rate and greater clarity about the timing of US interest rate rises.

The Government worked on potential taxation adjustments for oil and gas sector, in the shadow of low oil price and growing concern about the budget deficit. Given the oil price then started to rise, it reduced the need for extra tax hikes. In the longer term there remains the open question of rebalancing of tax take from business to households in line with the OECD structure of budget revenues. But we do not expect any serious changes to take place prior to the Presidential elections in 2018.

Our major concern on the economic front is related to investment and consumption, which are both under severe pressure, creating a negative feedback loop. Businesses are not ready to invest in an environment of downward pressure on demand and low spending power, while a lack of investment makes households nervous about spending cash.

Since the bounce in share prices and upward move in the currency, there has been some increase in investor interest in the Russian market. Consensus is slowly building that Russian assets are cheap and may be rerated one day, but timing is still very unclear. We expect volatility to remain elevated for the rest of the year, while liquidity is improving slowly.

We believe valuations and the earnings outlook are attractive. Corporate earnings reports suggest that we are going though the bottom of the cycle. We are seeing some early signs of earnings upgrades as well as a slow shift in the consensus on the outlook for dividends. There is a sizable debate surrounding Gazprom and what total payout they should make sustainably.

Performance

The major negative contributors over the period were:

-    Surgutneftegaz - The stabilisation of the exchange rate and the rising oil price represented significant headwinds for this name. The large US dollar cash position means a stronger ruble would be damaging for the stock.

-    Transneft -We do not hold the stock due to its very poor corporate governance story, which means we sometimes miss out when investor optimism pushes the price up. We believe the index weighting is too big for the stock's current liquidity and free float. We will not invest until substantial restructuring takes place.

-    QIWI - This payment services provider was hurt by concerns about regulation and legislation changes. We believe the stock is a good long-term story with strong upside potential in the event of a normalisation of market conditions, so we used weakness to add to our position.

-    Alrosa - We missed the rerating of this diamond miner related to privatisation speculation, but closed the underweight position as soon as rumours became a fact. The company has benefited significantly from the currency devaluation and better capital allocation. It is a national market leader, with potential to become a global one.

-    MTS - We underestimated the potential for multiple expansion in this mobile phone network provider, and missed out on the strong rally in the name over the period.

Positive contributions came from:

-    Gazprom - The valuation and dividend make the outlook for Gazprom more attractive than the market has recognised. We closed our underweight position in the period, moving overweight, and participated in the sharp rally.

-    Ros Agro - This agribusiness company was one of the top active bets in the portfolio, and we benefited as both the company and the share price performed strongly over the period. This stock is a good example of the benefits of investing through an investment trust, as we were able to accumulate a position in a period in which liquidity and interest in the name were very low.

-    Magnit - We reduced our position in this retailer last year, anticipating slowing sales and falling margins, and remained underweight for most of the review period. This generated positive relative performance as our expected scenario played out. We continue to like the business, so will use price weakness to add to our holding. The stock has the potential to be a good play on the economic normalisation story, as consumption will spike when incomes stabilise.

-    VTB Bank - This was another underweight position that benefited relative performance. The bank is badly managed and has a very risky business model, so we maintain our underweight.

The Company has an active position of 38%. The notable difference relative to the index can potentially create significant deviation from the performance of the benchmark on monthly and quarterly periods.

Portfolio activity

In the review period, we made two adjustments to the portfolio:

-    Ros Agro - We took part in the capital raising under which the company increased its capital base by USD 250 million. The new cash will be used for funding M&A, greenhouse projects and expansion in the Far East. In the last year, the company has become a clear national leader in its industry and an absolute leader in profitability. We expect this position to be a core holding in the fund for some time.

-    CIS countries - Following adjustments to the investment guidelines, we initiated positions in the Commonwealth of Independent States. Luxoft and EPAM Systems are both high-quality IT companies with very bright growth and profit outlooks, while TBC Bank is the leading bank in Georgia, with a very low valuation. We believe that these holdings will provide diversification and enable the fund to achieve broader representation of different sectors of the economy.

These purchases were funded by a reduction of positions in MICEX and Surgutneftegas, as the earnings outlook for both companies will be less exciting in a more 'normal' economic situation of a stronger currency, lower interest rates and a growth recovery.

Outlook

We believe that the long-term fundamental case for the Russian equity market remains intact and continues to provide ample opportunity for active fund managers to add value. We maintain our fundamental and rational investment approach, and our belief that, over the long term, returns for shareholders will be driven by earnings growth and return on equity. We focus on consolidating holdings in long-term, sustainable businesses and, ideally, long-term compounders of returns. The existence of such companies in the Russian market remains limited, and as a result they are likely to trade at a premium. We would welcome new issuance and improving market diversification, but it may take time to come.

We expect the earnings revision cycle to improve in the second half of the year, and should start to see some positive revisions to economic and corporate profit outlooks in the third quarter. As in any equity market, such revisions are likely to drive the general direction of the market and help investors to differentiate among market participants.

We do not expect any lifting of sanctions in 2016, but think the election cycle in the US and the European Union has the potential to begin driving change in 2017.

Oleg I. Biryulyov

Investment Manager

9th June 2016

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 2015.

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 postion and net return/loss of the Company, as at 30th April 2016 as required by the UK Listing Authority Disclosure and Transparency Rule ('DTR') 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 .

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

9th June 2016

statement of Comprehensive income

for the six months ended 30th April 2016

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th April 2016			30th April 2015			31st October 2015
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held   at fair value through profit or loss	-	30,041	30,041	-	(10,076)	(10,076)	-	(43,618)	(43,618)
Net foreign currency gains	-	356	356	-	38	38	-	199	199
Income from investments	1,785	-	1,785	3,615	-	3,615	13,598	-	13,598
Gross return/(loss)	1,785	30,397	32,182	3,615	(10,038)	(6,423)	13,598	(43,419)	(29,821)
Management fee	(198)	(790)	(988)	(200)	(799)	(999)	(397)	(1,587)	(1,984)
Other administrative expenses	(361)	-	(361)	(348)	-	(348)	(840)	-	(840)
Net return/(loss) on ordinary    activities before taxation	1,226	29,607	30,833	3,067	(10,837)	(7,770)	12,361	(45,006)	(32,645)
Taxation	(302)	158	(144)	(410)	-	(410)	(2,093)	324	(1,769)
Net return/(loss) on ordinary   activities after taxation	924	29,765	30,689	2,657	(10,837)	(8,180)	10,268	(44,682)	(34,414)
Return/(loss) per share (note 4)	1.77p	56.87p	58.64p	5.07p	(20.67)p	(15.60)p	19.60p	(85.31)p	(65.71)p

All revenue and capital items in the above statement derive from continuing operations.

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.

statement of changes in equity

for the six months ended 30th April 2016

	Called up	Capital
	share	redemption	Other	Capital	Revenue
	capital	reserve	reserve	reserves	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
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
Six months ended 30th April 2015 (Unaudited)
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)
Dividends paid in the period	-	-	-	-	(6,804)	(6,804)
At 30th April 2015	524	77	47,205	170,187	2,882	220,875
Year ended 31st October 2015 (Audited)
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	(560)	-	-	(560)
Net (loss)/return from ordinary activities	-	-	-	(44,682)	10,268	(34,414)
Dividends paid in the year	-	-	-	-	(6,804)	(6,804)
At 31st October 2015	524	77	47,204	136,342	10,493	194,640

¹ The revenue reserve forms the distributable reserve of the Company and may be used to fund distribution of profits to investors via dividend payments.

statement of financial position

 at 30th April 2016

	(Unaudited)	(Unaudited)	(Audited)
	30th April 2016	30th April 2015	31st October 2015
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	211,756	218,656	191,910
Current assets
Debtors	3,266	4,880	552
Cash and cash equivalents1	2,554	497	4,330
	5,820	5,377	4,882
Current liabilities
Creditors: amounts falling due within one year	(1,144)	(3,158)	(2,152)
Net current assets	4,676	2,219	2,730
Total assets less current liabilities	216,432	220,875	194,640
Net assets	216,432	220,875	194,640
Capital and reserves
Called up share capital	524	524	524
Capital redemption reserve	77	77	77
Other reserve	47,204	47,205	47,204
Capital reserves	166,107	170,187	136,342
Revenue reserve	2,520	2,882	10,493
Shareholders' funds	216,432	220,875	194,640
Net asset value per share (note 5)	413.5p	422.0p	371.9p

¹  This line item combines the two lines of 'Investments in liquidity funds held at fair value through profit or loss' and 'Cash and short term deposits' in the financial statements for the year ended 31st October 2015 into one.

Statement of Cash Flows

for the six months ended 30th April 2016

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2016	30th April 2015	31st October 2015
	£'000	£'000	£'000
Net cash outflow from operations before dividends   and interest	(1,047)	(1,261)	(2,616)
Dividends received	1,866	2,850	11,918
Interest received	11	5	8
Overseas tax recovered	-	64	66
Net cash inflow from operating activities	830	1,658	9,376
Purchases of investments and derivatives	(45,917)	(60,698)	(107,157)
Sales of investments and derivatives	52,174	64,677	107,228
Settlement of forward currency contracts	36	(12)	(9)
Net cash inflow from investing activities	6,293	3,967	62
Dividends paid	(8,897)	(6,804)	(6,804)
Repurchase of the Company's own shares for cancellation	-	(559)	(560)
Net cash outflow from financing activities	(8,897)	(7,363)	(7,364)
(Decrease)/increase in cash and cash equivalents	(1,774)	(1,738)	2,074
Cash and cash equivalents at start of period/year	4,330	2,248	2,248
Exchange movements	(2)	(13)	8
Cash and cash equivalents at end of period/year	2,554	497	4,330
(Decrease)/increase in cash and cash equivalents	(1,774)	(1,738)	2,074
Cash and cash equivalents consist of:
Cash and short term deposits	492	497	911
Cash held in JPMorgan US Dollar Liquidity Fund	2,062	-	3,419
Total	2,554	497	4,330

Notes to the Financial Statements

for the six months ended 30th April 2016

1.    Financial statements

The information contained within the financial statements of 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 2015 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 are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in November 2014.

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 2016.

In March 2016, the FRC published amendments to FRS 102 concerning fair value hierarchy disclosures. These amendments are effective for accounting periods beginning on or after 1st January 2017. The Company has elected to early adopt these amendments in these interim financial statements. Full disclosure is given in the Half Year Report and Accounts.

As a result of the first time adoption of FRS 102 and the revised SORP, comparative numbers and presentational formats have been restated where required.

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

The accounting policies applied to the condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st October 2015.

3.   Dividends paid¹

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2016	30th April 2015	31st October 2015
	£'000	£'000	£'000
Final dividend paid in respect of the year ended
31st October 2015 of 13.00p (2014: 13.00p)	6,804	6,804	6,804
2015 Special dividend of 4.00p (2014: 0.00p)	2,093	-	-
	8,897	6,804	6,804

¹  All dividends paid and declared in the period have been funded from the Revenue Reserve.

No interim dividend has been declared in respect of the six months ended 30th April 2016 (2015: nil).

4.   Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2016	30th April 2015	31st October 2015
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	924	2,657	10,268
Capital return/(loss)	29,675	(10,837)	44,682
Total return/(loss)	30,689	(8,180)	34,414
Weighted average number of shares in issue	52,337,112	52,421,725	52,379,071
Revenue return per share	1.77p	5.07p	19.60p
Capital return/(loss) per share	56.87p	(20.67)p	(85.31)p
Total return/(loss) per share	58.64p	(15.60)p	(65.71)p

5.   Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2016	30th April 2015	31st October 2015
	£'000	£'000	£'000
Net assets (£'000)	216,432	220,875	194,640
Number of shares in issue	52,337,112	52,337,112	52,337,112
Net asset value per share	413.5p	422.0p	371.9p

6.   Reconciliation of net loss on ordinary activities before taxation to net cash outflow from operations before dividends and interest

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th April 2016	30th April 2015	31st October 2015
	£'000	£'000	£'000
Net return/(loss) on ordinary activities before taxation	30,833	(7,770)	(32,645)
(Less capital return)/Add capital loss on ordinary activities   before taxation	(29,607)	10,837	45,006
Decrease/(increase) in accrued income and other debtors	237	(372)	(389)
Decrease in accrued expenses	(22)	(32)	(40)
Overseas withholding tax	(143)	(387)	(1,290)
Management fee charged to capital	(790)	(799)	(1,587)
Dividends received	(1,866)	(2,850)	(11,918)
Interest received	(11)	(5)	(8)
Realised gains on foreign currency transactions	13	63	200
Exchange gains on liquidity funds and Time Deposits	309	54	55
Net cash outflow from operating activities	(1,047)	(1,261)	(2,616)

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

JPMORGAN FUNDS LIMITED

ENDS

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

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