JPMorgan Russian Securities (JRS) aims to generate long-term total returns from investing in cash- generative businesses in Russia. Managers Oleg Biryulyov and Habib Saikaly aim to identify national champions which can grow through exposure to international markets; and to avoid those areas of the market with poor corporate governance.
In recent years the performance of the trust has been extremely strong in absolute terms. Over five years the Russian market has made impressive gains, massively outperforming the MSCI Emerging Markets index. This has been helped by the recovery in the oil price after its collapse in 2014, as well as pressure from sanctions proving to have a limited effect. Investors who hold only generalist funds are likely to have seen very limited benefit from this rally, as the market has shrunk to just 4% of the Emerging Markets index. JRS has outperformed the Russian market over that period (to 20 January 2020), as we discuss in the Performance section. In the managers’ view, as corporates and households have de-levered substantially, they should have the ability to spend and keep up the momentum in the economy.
Despite its strong run, the managers observe that the Russian equity market still remains extremely cheap relative to peers. The forward P/E of the MSCI Russia index is 6.7, just over half that of the MSCI Emerging Markets index at 12.8. Meanwhile JRS is on an 11.2% discount, wider than the average of 9.1% in the AIC Global Emerging Markets sector.
The yield on JRS’s shares is 4.6%, having been boosted in recent years by the Russian government’s demand that companies increase their payouts to shareholders. This is motivated partly by the fact that the Russian state is a shareholder in many of the largest companies in the market, and partly by a desire to counteract foreign shareholders’ concerns about investing in Russia. Both the management team and the board are convinced we have seen a secular shift in culture and further dividend growth is to be expected. As a consequence, the trust’s objective has shifted to providing a total return rather than just capital growth.