JPMorgan Russian Securities 05 May 2021

JPMorgan Russian Securities (JRS) aims to generate long-term total returns by identifying the companies in Russia with the best long-term growth prospects. The portfolio includes many traditional value stocks such as those in energy, materials and banking, but also some growth plays via the technology, e-commerce and consumer sectors.

Russia is a highly volatile market, but in recent years has generated strong returns for investors. JRS’s ability, as an investment trust, to invest at equal or overweight levels in the largest stocks in the market has been invaluable – open-ended UCITS funds are forced to underweight the country’s largest stocks. As we discuss under Performance, Russia has lagged the emerging markets index during the pandemic, but offers high beta to a global recovery – notwithstanding political risks.

JRS is managed by Oleg Biryulyov and Habib Saikaly. Following the start of the reflationary rally in autumn 2020, they have been tilting the portfolio back towards the value sectors and away from growth stocks. They expect the oil price to remain strong this year and for the profits of the majors to be multiple times last year’s.

In recent years the Russian market has become a valuable source of dividends following corporate governance reform and mandated payout ratios for state-owned enterprises, which have made the market one of the highest yielding. JRS’s objective has switched to total return from capital as a result, and the trust now yields 5.3%. As we discuss under Dividend, the board has resources to maintain the dividend if earnings slip in FY 2021.

JRS’s shares trade on a considerable discount of 14.5%, although we note this is close to the level they were trading at before the pandemic.

Russia has exciting potential to generate high returns when the conditions are right, as was seen in the 2018–2019 period. The high weighting to energy means that the market should have a high beta to a global economic recovery. While this is promising given the world economy’s current trajectory after the pandemic, Russia also suffers significant political risks which can counteract this potential. This seems to be happening now, with concerns about potential sanctions and Russian troop movements near Ukraine weighing on sentiment – and the rouble. However, we note that JRS is trading on a considerable discount, which we think should offer some downside protection. While the return potential in the market is high, investors should expect volatility along the way. For those that want to invest in Russia, we think the closed-ended structure is superior. JRS is able to equal or overweight the largest companies in the index, which helped it outperform in the last bull run for Russian equities where the large-cap stocks led the market.

JRS also offers a significant dividend yield as compensation for the volatility. While the managers tell us the impact of the pandemic on earnings will be felt in the current financial year, we note that the board has revenue reserves to use and the ability to pay from capital if it wishes.