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JP Morgan Russian Securities: New mandate will help avoid 95% losses

This update involves an immediate renaming of the investment trust to the JP Morgan Emerging Europe, Middle East & Africa Securities, reflecting the new areas now open to the managers.

The changes were initially signalled in the summer, back when the management claimed it still had enough resources to continue operating despite the closing of the Moscow Stock Exchange and the trust’s over 95% net asset value decline.

But with Russia’s invasion of Ukraine now in its ninth month, the investment backdrop for the company remained bleak and the management sought a way out of its investment gridlock.

JP Morgan Russian Securities’ shareholders vote ‘yes’ on mandate changes

Eric Sanderson, chair of the trust, recognised this in a London Stock Exchange notice yesterday, commenting: “The widening of the company’s investment objective is not a proposal that we would have made in normal trading conditions.

“However, with the situation for the company since Russia’s invasion of Ukraine on 28 February 2022 remaining unchanged and no one knowing where these tragic events will lead or what the future holds, today’s approval will at least provide an opportunity for the company to resume investment and income generation.”

The now agreed proposal will open the investment universe to include tocks domiciled in central, eastern and southern Europe, Middle East and Africa, including those markets that are considered as emerging markets, according to the S&P Emerging Europe, Middle East and Africa index, while still including Russia.

In the same notice, Sanderson condemned Russia’s ongoing attack, and said “our thoughts are with the Ukrainian people. It is a tragedy for them”.

The changes have been a point of contention for shareholders in the trust, mainly on the retail side who previously told Investment Week that they would vote against the proposal on the basis that they saw no real benefit for their investment case.

Many of them followed through as the vote was split 61.3% in favour versus 38.7% against, but the same group told Investment Week that they were “disappointed with the [retail] turnout”.

They said: “Assuming the ‘yes’ voters were institutions that the board spoke to on the proposals in advance of the vote, this equates to a retail turnout of 11% which is not surprising but really disappointing. Changing the mandate on a total turnout of 25% is sad.”

“Overall, this smacks of changing what many retail investors are invested in, many of whom who will have had no knowledge the vote even was happening due to platforms’ communication issues, under their noses,” they added.

Retail investors plan to vote against JP Morgan Russian Securities mandate changes

According to the Association of Investment Companies, whenever 20% or more of the votes are against a board recommendation the company is required to explain what action it will take to consult shareholders to understand the reasons behind the result.

In yesterday’s notice, JP Morgan said that they had received a number of questions from shareholders regarding the proposals and said many were concerned about “whether the implementation of the new investment objective and policy would be followed by an issue of shares or capital raising that would dilute their shareholding in the company”.

These concerns had been raised prior to the vote and JP Morgan had attempted to quell them at the time, confirming there would be no capital raise, even if sanctions were lifted in a notice earlier this month.

It also said clients were concerned about a “fire sale” of Russian equities if the market reopened, whereby the management was forced to sell out of the already discounted assets at the same time as rest of the industry.

The company readdressed these anxieties after the AGM, reaffirming there were still no plans for a fundraise.

The management reiterated it was “mindful of shareholders’ pre-emption rights and its duty to promote the success of the company for the benefit of the members as a whole”. 

“The company will continue to engage with shareholders to understand their concerns,” they said.

Speaking to some of the retail investors, they said that at present they would remain invested in the trust “but was clearly not the result we were after”.

According to Sanderson, expanding the portfolio to these other regions was “a step forward in attempting to avoid the crystallisation of current shareholders’ losses in the company of circa 95%”, allowing JP Morgan to rebuild some value in the trust.

JP Morgan Russian trust share price jumps 105%

According to the AIC, the trust is now trading on a 78.1% discount, with assets under management totalling £18.9m.

Speaking to retail investors who voted against the changes, they argued that if the vote had been a special resolution instead of ordinary, the vote would not have been “quorate”. Had it been quorate, “it would not have passed with the % yes as 75% in favour is needed,” they said.

A spokesperson for JP Morgan said that in accordance with FCA Listing Rule 15.4.8, for this type of portfolio change, shareholder approval is required and this is most commonly sought by ordinary resolution.

Back in July when this potential vote was first made public, the management said that if it was voted through it would reinstate its management fees, which the team had wavered days after Russia’s initial invasion.

JP Morgan has not yet confirmed if these have now been reinstated.

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