Interactive Investor

Investor uprising against vote that could cost them 750% returns

9th November 2022 10:34

Sam Benstead from interactive investor

Shareholders in JPMorgan Russian Securities are pushing for a ‘no’ vote as the investment trust seeks to change its mandate.

Investors are banding together to influence the outcome of a shareholder vote on the investment mandate of JPMorgan Russian Securities (LSE:JRS) investment trust. 

On 23 November, shareholders will vote on whether the Russia trust will alter its investment remit to include emerging Europe, the Middle East and Africa.

More than 100 DIY investors, which they say account for around 5% of the trust shares and include shareholders with greater than £100,000 stakes, are pushing for a “no” outcome in the vote.

The shareholder group are concerned that a new mandate may impose a limit on the Russian exposure of the trust - even though the JRS board laid out in its proposal that there would  be no maximum or minimum exposures for any geographical region or sector if the investment mandated was changed. 

If the Moscow Exchange (MOEX) reopens to foreigners there may be a rush to liquidate Russian holdings by Western investors, which may depress share prices, the shareholder group argues.

“This would result in JRS disposing of shares below intrinsic value due to a short-term supply/demand imbalance in the shares,” a spokesperson said.

JRS shares have continued trading, but the net asset value (NAV) of the trust has been marked down due to sanctions on Russian companies following the invasion of Ukraine and foreigners being blocked from trading Russian shares.

Shares trade at around 80p, compared with a stated net asset value of 47p. They changed hands for around £8 a year ago before collapsing in February. 

However, the shareholder group argues that the true NAV is 695p based on the value of the Russian shares currently traded in Russia, as of the end of October. This suggests just over 750% upside if the portfolio was able to be cashed in at fair valuations.

A member said: “Investors are told to have a three- to five-year investment horizon, but only eight months has passed since the invasion. The Russian market may not be closed forever. Some companies could go private and send cash back to Western investors via a different route. Detsky Mir, a toy company, is said to be exploring this option"

The shareholder group says that the company can keep operating from the returns it is generating on cash.

“At present, the NAV per share of JRS is around 47p and the share price around 80p. Of the 47p, close to 90% is invested in a money market fund which produces more income on the cash than the running costs of the trust. Therefore, JRS could operate in the status quo indefinitely while it waits for the reopening of the Moscow Exchange to foreigners.”

An additional concern the shareholder group has is that by changing the mandate into one which allows for investments elsewhere, JPMorgan Russian Securities may then pursue a capital raise and issue new shares, which would dilute the potential returns from the Russian stocks.   

The spokesperson said: “The capital raise is in JP Morgan’s interests as it will raise the investment management fees earned on the trust. It would also dilute the returns of the private investors who own the trust with this investment thesis, who form a majority of the ownership base.”

Regarding this concern, the board of JPMorgan Russian Securities said this week that it was not planning to issue new shares or raise capital, and it was “conscious” that “its duty is to promote the success of the company for the benefit of the members as a whole”.

JPMorgan Russian Securities has a strong DIY investor ownership because institutional investors have been forced to sell shares due to reputational concerns. One large institutional investor remains: City of London Investment Group (LSE:CLIG), a specialist emerging markets fund manager whose shares are listed in London.

A spokesperson for the investor group said: “Someone has to own these shares, and DIY investors may not face the same ethical concerns that professional investors do.” 

Cliff Weight, director at ShareSoc, a group that supports individual investors, said: “It is very good when shareholders give up their time to organise these action groups. However, this is a high-risk trust to trade now, and even though it has lost 90% of its value, it can still fall further. It just shows the importance of having a diversified portfolio.”

Shareholder democracy

The shareholder group says that regardless of the outcome of the vote, the board of JPMorgan Russian Securities is proposing changes entirely in its own interests – and believes they can get away with it because DIY investors tend not to use their votes.  

“Regardless of the outcome, I am sure we can agree it is not good for retail activism if one minority institutional shareholder is able to decide the vote due to vast retail abstentions. Anything you can do to at least inform your investors about the vote is much appreciated,” a group spokesperson said.

The group adds that they may even propose a general meeting under Section 303 of the Companies Act 2006 to speak out against share dilution, prohibiting disposing of Russian shares below 90% of their three-month average price on the Moscow Stock Exchange, and proposing a friendly institutional shareholder to the board to represent minority interests.

J.P. Morgan Asset Management declined to comment on the shareholder action, but said that the JRS Board encourages all of its shareholders to exercise their rights.

Last November, interactive investor made being able to vote at company annual general meetings, and other voting events, the default setting. Customers receive information about shareholder meetings in their voting mailbox. You can find out more here.

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