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JPMorgan Russian widens discount target

JPMorgan Russian has announced interim results covering the six months ended 30 April 2016. 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%.

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.

The major negative contributors relative to the benchmark 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 -They 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. They believe the stock is a good long-term story with strong upside potential in the event of a normalisation of market conditions, so they used weakness to add to the position.
  • Alrosa – They 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 – They 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.

JRS : JPMorgan Russian widens discount target

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