Don’t be shy, ask ii…why is this investment trust on a huge premium?

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Mr Russell asks: since the invasion of Ukraine by Russia, the JPMorgan Russian Securities Investment Trust has consistently traded at a large daily premium to the daily published net asset value (NAV). The premium has recently been about 200%. Why is the market so optimistic on the hidden value in this trust?

Kyle Caldwell (pictured above), collectives editor, interactive investor, says: Russia’s invasion of Ukraine on 24 February sent shockwaves through global stock markets, and, as well as the horrific humanitarian crisis, subsequent sanctions against Moscow have had dire economic and social consequences. Because of this, many companies, funds and investment trusts exposed to Russia have hit trouble.

Given that investment trusts (closed-end funds) are traded on the stock market, JPMorgan Russian Securities (LSE:JRS) has remained open despite some of its underlying investments being untradeable due to the inability of non-Russian nationals to buy and sell shares.

In contrast, open-ended funds that invest exclusively in Russia, or have a significant amount of exposure to the country, have put fund suspensions in place. This prevents investors from accessing their cash.

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The fund suspensions were introduced while the Moscow Stock Exchange was closed but have been retained since the market partially re-opened on 24 March because of the block on non-Russian nationals from trading. Given that fund managers cannot sell stocks, money cannot be raised to meet withdrawals when investors want to sell. Funds typically have a small cash position – typically 5% or less – to help fund redemptions. However, at times of heavy selling such cash buffers can rapidly be depleted.

While investment trust managers are not forced to sell holdings to redeem investors, the trade-off is that the market can take a dim view of the outlook and force share prices down, which is what has happened to JPMorgan Russian Securities. The day prior to the invasion (23 February), its share price stood at 574p. It is currently 124p, which represents a decline of 78.4%.  

Its net asset value (NAV), which reflects how much the underlying investments are worth, has also plummeted, from 621p to 46p. This is a drop of 92.6%.

In mid-March it was announced that some of the underlying investments – totalling 6.5% of its NAV – had been given a ‘fair value’ estimate rather than its market value. The board of JPMorgan Russian Securities cautioned: “While the company has applied a fair value against these investments there is no certainty that any value will be achievable from them over the short, medium or even long term due to the factors arising following the imposition of additional sanctions against Russia.”

There were no changes in how the rest of the portfolio was valued, two-thirds of which is listed in Kazakhstan. In mid-March, 15.4% was in cash.

The share price is now notably higher than the NAV – putting the trust on a sky-high premium of 142%. Usually, investment trust analysts caution against buying a trust on a premium of over 10% - as the risk is that the high premium will cool and potentially turn into a discount when conditions change. When this happens, investors who had bought at a high premium see their returns harmed.  

In the case of JPMorgan Russian Securities, the high premium reflects demand for the shares, with some investors attempting to ‘buy low’, following the heavy share price falls, anticipating that the underlying value of the trust’s holdings will eventually be restored. Among the buyers have been interactive investor customers – the trust was the second most-purchased investment trust in March.

In early March, the trust had a continuation vote, which it has every five years. Shareholders overwhelmingly voted for the investment trust to continue (99.4%), with two-thirds of shareholders voting.

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James Carthew, head of investment companies at QuotedData, says the high premium reflects that some investors are optimistically “betting that sanctions will be lifted”.

He added: “There’s some theoretical value to the portfolio if things get back to normal. However, that looks like an increasingly distant prospect. An investment in JPMorgan Russian Securities is probably just a bet on regime change in Russia. Even with that, Russia would presumably be liable for reparations.”