JPMorgan Russian (JRS) has announced its interim results for the six months ended 30 April 2022, which include proposals to amend its investment objective and policies to permit investments in Emerging Europe (including Russia), the Middle East and Africa. As a precursor to asking shareholders permission, the board is requesting authorisation from the FCA to make this amendment. Assuming that FCA approval is forthcoming, a resolution will be put to shareholders at a general meeting, expected to be held as soon as possible in the autumn of 2022. The proposals have been formulated in direct response to the closure of the Russian market, in an attempt to preserve value for shareholders, and so the board will be recommending that shareholders vote in favour of the resolution. [QD comment: while this sounds like a sensible proposal, we struggle to see how this can be achieved in any meaningful way, unless JRS can either sell its existing portfolio, which looks very difficult at best, or can find a way of raising additional funds, which is also a tough sell. It is also difficult to see how, even if a purchaser can be found and the various legal hurdles overcome (no small feat), a sale could be achieved at a meaningful price (JRS would clearly be a forced seller). It is therefore hard to see how there would be enough left over, after any sale, to constitute a meaningfully sized fund.]
Performance – a story of two halves, punctuated by the Russian invasion of Ukraine
JRS’s chairman, Eric Sanderson, says that Performance in the period can be divided into two parts. Performance from 1st November 2021 to 23rd February 2022 was satisfactory, but that all changes following the invasion of Ukraine on 24th February 2022. The imposition of the strict economic sanctions on Russia and Belarus that followed have drastically reduced the valuation of JRS’s assets since.
A comprehensive package of sanctions followed
The sanctions and restrictions that followed the invasion were wide ranging and had a very sharp negative effect on JRS and international markets. In summary, the changes have included the closure of the Moscow Exchange (MOEX) to trading by overseas investors, unavailability of prices on RDXUSD (Russian Depositary Index USD) and prices of American Depositary Receipts (ADR) and Global Depositary Receipts (GDR), the prohibition of dividend payments by Russian companies to western shareholders and cessation of reporting of JRS’s benchmark data by western registered news services.
JRS portfolio hammered – NAV falls 95.2% as at 30 April 2022
The restrictions imposed since the invasion have had a severe negative impact on the value of JRS’s portfolio as almost all of its portfolio consisted of Russian equities. The board says that, without access to the Russian equity market following the invasion of Ukraine, it has been necessary to fair value Russian company stocks in the Company’s portfolio, resulting in a massive reduction in the Company’s net asset value (as at 30th April 2022, it was 47.1 pence per share, a decline of 95.2% in the six month reporting period). Since the period end, JRS’s NAV has fallen further and as at 26th July 2022, was 45.4 pence per share.
Institutions have been cutting their losses
While JRS’s shares have continued to trade on the London Stock Exchange, the precipitous fall in its share price led to its removal from the FTSE All Share Index on 17th June 2022. The Company’s share price as at 30th April 2022 was 107.5 pence, a decline of 87.6% in the six month period to 30th April 2022 [QD comment: keen eyed observers will note that, as at the 30 April 2022, JRS was still trading at a huge premium to NAV. We have repeatedly commented that we thought it particularly distasteful that some private investors were trying to make a quick buck speculating that there could be a huge rerating if a quick resolution to the conflict could be found, which clearly hasn’t come to pass]. Since the period end, the share price has fallen dramatically and, while it still trades at a premium to NAV, the premium has seen massive erosion. As at 26th July 2022 the share price was 69.5 pence. JRS’s board comments that it has seen significant changes in the fund’s share register. It says that, as some institutions reduced their holdings following the invasion there was significant demand from individuals to buy shares and consequently institutional holdings have fallen from approximately 70% to 36% as at 30th April 2022.
Revenues received have collapsed
Like JRS’s performance, revenue income for the period is a story of two parts, punctuated by the invasion of Ukraine. The prohibition on the receipt, by foreign investors, of dividends from Russian companies, introduced soon after the invasion, will reduce JRS’s revenue income for the year significantly. However, revenue for the six month period to 30th April 2021 after taxation was £4,277,000 (30th April 2021: £2,399,000) and the return per share, calculated on the basis of the average number of shares in issue was 10.56 pence (30th April 2021: 5.58 pence) per share, reflecting the healthy dividend receipts before Russia’s invasion of Ukraine. JRS paid its first interim dividend of 15 pence per share for the current financial year, which had been declared before Russia’s invasion of Ukraine, but no further dividends will be paid in the current circumstances [QD comment: it is hard to see how JRS will be in a position to pay any further meaningful dividend unless the restrictions on paying dividends to foreign companies is removed. With Western sanctions locked in for the long-term, this restriction looks set to stay].
JRS has also been shedding directors
Two of the Company’s directors, Tamara Sakovska and Ashley Dunster, resigned following Russia’s occupation of Ukraine. Tamara Sakovska is a Ukrainian citizen and felt she could no longer serve on the board of a company investing in Russia. Ashley Dunster had a conflict of interest that meant he too felt he must step down. In line with the Company’s succession plan, as announced on 4th October 2021, Gill Nott, the Company’s former Chairman did not stand for reappointment at the Company’s AGM on 4th March 2022. Prior to the date of Gill’s departure, the board had unanimously agreed that Eric Sanderson would be appointed chairman immediately following the AGM. Dan Burgess, who was appointed to JRS’s board on 4 January 2022, became the Audit Committee Chair, as planned, immediately following the Company’s AGM on 4th March 2022. JRS says that the current intention is for the board to continue with a complement of three directors during the current difficult period. There are no current plans to recruit additional directors.
Outlook – holding investments in Russia could become prohibited or unviable
JRS’s board says that, if current levels of public concern in much of the West about the humanitarian crisis unfolding in Ukraine continues, many Western governments will be under pressure to permanently and significantly reduce their reliance on Russian energy supplies. This, together with the continuing exclusion of Russia from Western financial systems may destabilise and isolate Russia to such an extent that holding investments in the country becomes prohibited and/or unviable [QD comment: in practical terms at least, we think this point has already been reached].
JRS’s board says that, although the outlook for the Company is uncertain, it is capable of continuing as a going concern for at least several years and it is the board’s hope that it will be possible to amend the Company’s investment objective and policies as referred to above and help steer the Company through this difficult period and preserve as much value in the Company for shareholders as possible. With much of the Company’s portfolio effectively ‘frozen’ for the foreseeable future, the latest interim report does not include the usual report from the Investment Managers. Instead, it is hoped that the schedule of Frequently Asked Questions will address many of the questions that shareholders may have. [QD comment: we hope that the board is able to salvage as much value for shareholders as it can. However, it is difficult to see how this can be resolved and, while we admire the directors’ perseverance, there is a danger of prolonging the agony. Rather than opting for a death by a thousand cuts, it might be better to wind the fund up now.]