Investment Trust Insider: JPM Russian Securities - a rocky but rewarding ride

I had a look at JP Morgan Chinese last week. This week it is the turn of JP Morgan Russian Securities (JRS). It has the distinction of being the only Russian fund to outperform the MSCI Russia Index over the past year and appears to have an excellent long-term record, having returned almost twice as much as that index over the past decade, making investors five times their money.

The fund is a decent size, with a market cap of £282 million, and has been around since 1994, which makes it the oldest investment company specialising in Russia. It became an investment trust in 2002; prior to that it was an offshore fund.

At the moment, it is trading on a discount of 12.5%, having widened out a little over the course of this year. This is wider than the board’s desired maximum of 10% and the company has bought back a few shares recently.

It uses the MSCI Russia 10/40 index as its benchmark – one of a number of indices MSCI introduced to make it easier for investment managers that wanted to comply with the Ucits III rules on the concentration of portfolios. The 10/40 indices limit the largest stock in the index to 10% of the market cap of the index and limit the combined weights of all those stocks that comprise more than 5% of the normal index to 40%.

Russia’s three kings

Interestingly, there is quite a divergence between the MSCI Russia 10/40 index and the MSCI Russia index and that is because around half the MSCI Russia is composed of just three stocks – Gazprom, Lukoil and Sberbank – and the energy sector accounts for over half. If you compare the fund’s long-term performance with the 10/40 index, the fund has more or less matched its benchmark since launch.

In its last full accounting year, which ended 31 October 2011, JRS’s performance was very poor relative to its benchmark and this has dragged down the fund’s long-term figures.

The reason for this was a conscious decision by the investment manager to underweight the energy sector. This worked well for a while, but came unstuck when the oil price recovered in September 2011.

The board was rattled enough to consult shareholders on the best way forward and came up with a cut in the management fee from 1.5% to 1.2% and limits on divergence in sector weights between the portfolio and the benchmark and a limit on the maximum overweight in any one stock.

It also held a continuation vote in January this year. It passed this comfortably and the next is scheduled for 2017.