JPMorgan Russian Securities 15 December 2021

JPMorgan Russian Securities (JRS) is unique in that it is the only investment trust focussed solely on the Russian market. As noted in Performance, JRS is the best performing dedicated Russia fund available to UK investors over the last three, five and ten years (as at 23/11/2021). JRS has been managed by the highly experienced Oleg Biryulyov for over two decades and continues to bring invaluable knowledge of his native Russia to the strategy. Oleg was joined by co-manager Habib Saikaly in 2018. The flexibility afforded by the closed-ended structure allows the managers to fully express their views on the highly concentrated Russian market.

As discussed in depth in Portfolio, the Russian market is highly concentrated in terms of stocks and sectors, the three largest companies being two energy producers and a bank: Gazprom, Sberbank and Lukoil make up c. 42% of the RTS Index (as at 30/11/2021). This means that the Russian market will not be to the taste of everyone. However, for more adventurous investors, Russia offers an intriguing opportunity based on the growth potential from higher energy prices and the attractive dividends paid by Russian companies.

As noted in Dividend, pay-out ratios of Russian companies have increased significantly in recent years due to political pressure from the Russian state. This has resulted in a dividend yield for JRS of 4.6% (as at 23/11/2021). The board reports that earnings on the portfolio recovered faster than expected in the FY year ending 31 October after the disruption of the pandemic, and they have been able to pay the larger interim dividend for 2021 in line with 2020.

The Russian market has been overshadowed by political risk for many years, and recent times have seen heightened tensions. However, the resulting cheapness, high dividend yields and the possibility of earnings growth from structurally higher energy prices offer the potential for high returns for adventurous investors willing and able to accept the substantial volatility, concentration risk, and cyclicality of Russian equities. Given that many investors with higher risk tolerances will tend to have significant exposures to highly rated growth stocks in their portfolios, there are also potential diversification benefits from owning a value-orientated strategy. Also, given how directly energy prices drive the returns of the Russian market, an allocation could be used as a potential inflation hedge or a geared play on global economic recovery.

For income investors with a sufficient risk tolerance, Russian equities are potentially attractive, given the high yield and potential for dividend growth as companies such as Gazprom enjoy a windfall from high energy prices. The strong recovery in portfolio earnings reported by the board and their decision to maintain the main dividend payment for the year are positive indicators for future payouts. For those who want to invest in Russia, JRS has to date been an excellent vehicle, the experienced manager using the flexibility of the closed-ended structure to deliver the outstanding long term returns versus both active and passive dedicated Russia funds available to UK retail investors.