JPMorgan Russian dividend up 50% as it beats benchmark – The Russian market was up by 8.4% over the year ended 31 October 2017 (benchmark index RTS). JPMorgan Russian’s return on a net assets basis outperformed the benchmark by 1.4% returning 9.8%. The return to shareholders also outperformed the benchmark, with a rise of 13.1% giving an outperformance of the benchmark of 4.7%. The discount narrowed slightly to 14.5% at the year end. The dividend has been increased by 50%, from 14p to 21p, reflecting higher income earned by the company.
JPMorgan Russian’s chairman said “Politics continues to dominate any conversation about Russia. What is often forgotten is that Russia is a country with a growing economy, vast resources and one that has adjusted to the difficulties arising from sanctions and lower oil prices than it was used to in the past. The country is returning to growth.”
The manager says that, on the positive side relative to the benhcmark, the fund gained most from positions in:
- Tatneft – This smaller, local oil player continues to deliver on stable production and investments in the downstream space. Less liquid shares benefited more from volatility. Higher payout ratio for dividends was applauded by the market.
- Sberbank – The Bank of Russia, with 50%+ of deposits/loans and 80%+ of profit in banking sector. It is a dynamic/innovative leader of the industry with return on equity above 20% and an attractive valuation. Sberbank represented the largest holding in the company during the review period.
- VTB – A stock that JRS does not own. A lack of clear strategy, poor capital allocation and inferior return on equity have been reflected in VTB’s poor performance, so not owning it proved eneficial for performance.
- Polymetal – This strong junior miner, with a highly experienced and focused management team, successfully delivered on new projects and its capital allocation remain good. They like this company, which is one of the company’s smaller core holdings.
- TBC Bank – One of their investments outside Russia, this country leader in Georgia draws on a very focused and professional team. Its return on capital and valuation make it a very attractive proposition and they are happy to have it as a core holding in the portfolio. TBC Bank is an example of a company that the managers can now buy following the 2016 review of the company’s strategy and the limited expansion of its investment universe to the CIS countries.
Last year’s major stock-level detractors were:
- MTS -They do not own this stock. MTS’s ongoing legal case against Rosneft has been a cause for concern. Valuations are in line with the industry and the dividend yield is unlikely to be sustainable thanks to a slowly shrinking top line. Not owning the stock last year proved to be a mistake, but it is hard to make a long-term investment case for owning it now.
- Magnit – Magnit proved the major disappointment of the year when earnings fell short of expectations, leading to a significant derating of the investment multiple. As a result, the stock is down almost 30% and, like all ‘fallen angels’, is a victim of market apathy. They think we will see another two quarters of lacklustre results, with a major restructuring programme taking place. However, they still see this company as a ‘national champion’ and it will remain a core holding for the portfolio.
- RosAgro – The cyclicality of commodity prices severely tested RosAgro’s financial results last year. The share price has been moving around quite significantly, but underperformance was almost mitigated by its large dividend yield of almost 7%. They continue to believe in RosAgro’s investment strategy and view it also as a ‘leading stock’. The stock will continue to be a core holding for the company.
- Yandex – In a year when more than 50% of global equity market performance came from the IT sector, the portfolio suffered from not owning this name. They did not recognise that the market would be willing to continue expanding earnings multiples for the stock with above market average earnings growth potential. However, they believe that the valuation is excessive and are sceptical about the value the market has assigned to the Taxi business. While not owning the stock has hurt performance, the valuation looks prohibitive and they will avoid it for now.
- Transneft – Transneft is not a company per se, but a Russian state-owned transport monopoly that they do not own. Its corporate and share capital structure are not ideal for minorities. The stock does not look attractive in its current form and they will avoid it at least until further changes take place.
JRS : JPMorgan Russian dividend up 50% as it beats benchmark