Despite markets being destabilised by swathes of sanctions on Russia alongside the geopolitical instability that the invasion of Ukraine has caused, specialists such as Terry McGivern, senior research analyst at AJBell, believe the long-term performance of investment portfolios will not be unduly affected.
A number of Russian equity and emerging European equity funds have been shuttered in the past few days, as sanctions have led to the UK cutting off most access to financial markets in Russia.
McGivern said he believes the single-strategy Russia-focussed open-ended funds will stay frozen until conditions improve, much like the open-ended property funds did in 2020.
You can’t do anything, so what’s the point in getting worked up about it?YearsleyThis is because the underlying securities in the fund have been frozen, leaving it impossible for managers to calculate net asset value, he said.
For index funds or those with some exposure to Russia as part of a broader geographic mandate, for example emerging markets funds, he said firstly it seems that all the index providers are moving Russia out of any benchmarks to a standalone status.
“This being the case, I imagine the Russian holdings in multi-geography index funds, ETFs and in active funds, will likely be zero priced, causing a one time performance hit, with the fund managers side-pocketing these assets, then working to dispose of the underlying holdings over a longer period, with any proceeds being reimbursed to the fund in due course.”
For those in ETFs, he said, although the primary market is closed, the secondary market is still open for buyers and sellers to exchange on listed venues.
This means price discovery is still happening, and is the best indicator of where the true market is seeing things, he said.
But the pricing will be at heavy discounts to the net asset value of the fund he said, so any investor looking to rid themselves of these investments will take a hit.
“[The NAV of funds] will be stale due to the underlying shares not refreshing their prices due to suspension and there being no arbitrage mechanism to keep the NAV and market price in-line.”
The investors in suspended funds are currently 'stuck', said Ben Yearsley, director at Fairview Investing. But this should not cause panic. He said: “You can’t do anything, so what’s the point in getting worked up about it?”
Markets are behaving as we would expect them to.BoothHe said Russian equities have never been a mainstream investment for advised clients, perhaps due to the fact that the country hasn't been open for foreign investment for long, and Putin has been in power for the majority of that time.
“It’s not a mainstream [investment], there’s never been any interest in Russia [for investors].
“Maybe it’s down to perceptions of Russian and corruption and Putin over the last 20 years.”
The investment in these funds is most likely through D2C platforms as opposed to advised clients, he added, exposing retail investors.
For example, some 6.4 per cent of JP Morgan’s Russia Securities investment trust is owned by Hargreaves Lansdown, according to data from the Financial Times.
Hargreaves owns the largest direct-to-consumer platform, with 19 per cent of the market share, according to Boring Money.
Stark reminder
Dzmitry Lipski, head of funds research, Interactive Investor, said as concerning and unprecedented as this has been for emerging markets, it has served as a stark reminder that they should only be a satellite holding.
“We’ve been here before with property funds, during the UK referendum and the financial crisis, but this is uncharted territory for global markets,” he said.
Gating funds won’t have been an easy decision for any group and would have been taken in the best interest of investors as managers grapple with the impact of the sanctions, he said, adding that it would provide breathing space.
“This is first and foremost a humanitarian crisis of which the financial ramifications are potentially only just starting to play out.”
David Booth, executive chairman of Dimensional Fund Advisors, said it is essential to assess whether markets are currently functioning property.
“Right now, markets are behaving as we would expect them to – they are open, trades are executing, buyers and sellers are coming together and setting prices,” he said.
The world has seen many crises during the more than 50 years he has studied markets, which has taught him that uncertainty and volatility are a part of investing, he added.
“Time and again, markets have rewarded investors willing to focus on their goals and stick to their long-term plan.”
sally.hickey@ft.com
