JPMorgan Russian beats its benchmark

JPMorgan Russian Securities JRS - Expert access to attractively valued market

JPMorgan Russian beats its benchmark – over the year to 31 October 2018, JPMorgan Russian Securities outperformed its benchmark, the RTS Index, by 1.5%, with a total return on net assets of 12.1%. However, the discount widened and that meant that the return to shareholders was 6.9%. As at 31st October 2018 the discount was 19.0%. The chairman points out that the Russian economy continued to grow in the reporting period, benefitting from a number of factors including growing revenues from exports of energy and materials, lower inflation and declining interest rates. the upshot is that Russia remains one of the cheapest major stock markets, globally.

The dividend totalled 26p, up from 21p for the prior year, reflecting the strength of income generation from the portfolio.

Extract from the manager’s report

A year ago, we forecast a better outlook for energy prices and dividends from the sector and this proved to be the case during the period under review. As well as rising oil prices in the reporting period, higher trading volumes and a weaker rouble also supported the sector. In the reporting period we increased our position in LUKOIL, having been impressed by its improving corporate governance. It is one of the world’s largest oil and gas companies, employing over 100,000 people and accounting for more than 2% of the world’s oil production. For the first nine months of 2018 LUKOIL’s sales increased by 40.2% and its profits rose by 54%.

We invested in oil and gas company Surgutneftgaz which was formed from several previously state-owned companies. This is one of Russia’s largest companies and we consider it a long-term opportunity given its significant US dollar cash reserves and strong balance sheet. However, within the review period, we subsequently reduced our exposure because of weakening rouble concerns. 

We took profits from both Gazprom and Tatneft over the year. The latter is a smaller, local oil player with a progressive dividend policy; it remains a Top 10 holding. Gazprom is the largest supplier of natural gas to Europe and Turkey and the second largest holding in our portfolio.

Away from the Energy sector, we also have significant exposure to both Materials (17% of assets) and Financials (16%). A year ago, Russia’s largest bank Sberbank was our largest holding. It is a dynamic and innovative leader of the industry and remains a core holding for us, although we took advantage of share price strength earlier in the year to take profits. Sberbank’s share price volatility has reflected US sanction risk concerns, falling to a 1-year low in August. Although volatility will remain a concern in the short term, we are encouraged by the long-term investment opportunity that Sberbank offers, not to mention its solid net-interest margin performance, continuing mortgage business growth and strong deposit inflows. We continue to see it as a classic ‘blue chip’ stock with a strong brand and in an industry with growing barriers to entry, and are likely to use further price weakness as an opportunity to increase the position.

A stock that we don’t hold is VTB, a global provider of financial services and Russia’s second largest bank. This is a decision that has contributed positively to relative performance. VTB is operating under sanctions and has been the subject of negative news flow for some time. Apart from political considerations, the company has struggled in a relatively low-interest, low volatility environment; we prefer the quality and market leadership of Sberbank.

We have continued to add to our position in Tinkoff (part of TCS Group), Russia’s leading provider of online retail financial services, with over 7 million customers. The company was founded in 2006 by Russian entrepreneur Oleg Tinkov. We believe the company has an able management team and is certainly a market leader in terms of its product development.

Moving on to Materials, the Company’s exposure to this sector remains relatively high by historical standards and is also in comparison with the benchmark index. Our largest holding in the sector is Norilsk Nickel, a palladium and nickel mining and smelting company that we purchased late in the reporting period, a decision driven by the stock’s attractive valuation and high dividend yield as well as the weakness of the rouble. As regards stock stories from other sectors, one of Russia’s largest food retailers, Magnit was a core holding for the portfolio in the past. The stock was sold during the year, as the retailer’s stock price fell sharply, impacted by several macro factors, such as lack of food price inflation, subdued disposable income growth and increasing competition.

It was also been a tough year for RosAgro, one of Russia’s largest agricultural companies and a major producer or pork, fats and sugar. Although we continue to believe in Ros Agro’s investment strategy, a combination of factors including overproduction of both sugar and grain domestically hurt its profitability – and made a negative contribution to the Company’s performance this year.
We sold our holding in steel making and mining company Evraz. The company was a strong contributor to overall performance during the year but our concern over balance sheet risks dampened our conviction, so we sold our position.

Shareholders may recall our reference to Yandex in last year’s report as the portfolio had suffered from not owning this Information Technology stock in a year when IT stocks had stormed ahead, and technological advances were continuing to transform business and almost every other aspect of our lives. Yandex is a leading domestic internet business that also specialises in market-leading on-demand transportation service (Yandex.Drive and Yandex.Taxi). We initiated a position at an opportune time during the year. We like this business for its innovative talent, its focus on profit (which ensures there is adequate cost control) and its ecosystem of services.

Finally, a stock that we do not own is Mobile TeleSystems (MTS), Russia’s largest mobile phone operator. Despite issuing a strong set of figures early in 2018, MTS also indicated that its future revenue growth could decelerate, and its share price fell over the period. Our decision to avoid MTS is primarily driven by concerns that the Russian government could seek to increase its influence over the mobile telecommunications sector in the future.”

JRS : JPMorgan Russian beats its benchmark


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