- Most emerging market funds had no or limited exposure to Russian equities before the invasion of Ukraine
- But emerging market investment trusts with little exposure to Russia have historically traded at relatively steeper discounts
The dramatic news from Ukraine inevitably had a severe effect on the markets. As the IC coverage points out, there are implications for a variety of major equity sectors. Unsurprisingly, Russian equities sold off strongly when the news broke with mixed results across the fund universe.
Some passive Russian stock trackers and active funds such as JPMorgan Russian Securities (JRS) and Liontrust Russia (GB00B86WB793) are almost entirely focused on this market. Predictably, these have suffered huge losses so far this year. Between the start of the year and February 25, JPMorgan Russian Securities fell 32% and Liontrust Russia 45%. Exchange-traded funds (ETFs) of Russian stocks fell by around 40% during this period, which proved painful for investors reported by the FT who had piled into these funds just before the invasion.
Pure volatility also had some weird side effects. Bid/offer spreads on Russian equity ETFs exploded and on February 24 London Stock Exchange (LSEG) announced that it would allow a maximum deviation of 10 percent, double the limit that was in place during the pandemic sell-off in early 2020. In another bizarre development, shares of JPMorgan Russian Securities had risen to a premium to its net asset value (NAV) at the time of the writing. This is likely because the shares of the investment trust have not fallen as rapidly as the prices of its holdings.
Extreme losses and changes in the structure of the Russian market could pose existential questions for funds dedicated to Russia. To give an example, the oil company Rosneft (UR:ROSN)which was struck by the shareholder BP (PB.) announcing a plan to sell its stake, was one of the top 10 constituents of the MSCI Russia Index before the invasion, and one of the largest holdings of JPMorgan Russian Securities and Liontrust Russia.
Some Russian funds have already encountered difficulties. On February 28, investors were informed that trading had been suspended in JPM Emerging Europe Equity (GB00B1XMTT16), with JPMorgan Asset Management noting that “local market trading conditions are not currently operating as they normally would.” The suspension will be reviewed as time goes on.
Liontrust Russia also suspended operations on the same day, with the fund company citing events such as the closure of the Moscow Stock Exchange and a temporary ban on foreign investors selling Russian stocks.
Emerging Markets and Russia Funds
More traditional equity funds tend to have limited exposure to Russian stocks. Global and European funds are generally unlikely to have an allocation to these. And, with a few exceptions, emerging market funds also have relatively little exposure.
As the chart shows, 24 funds from the Global Emerging Markets sectors of the Investment Association and the Association of Investment Firms had at least 5% of their assets in Russia shortly before the invasion. All figures come from fund sheets which show fund positions at the end of December or January. While a 5% weighting seems modest, four funds had a double-digit allocation to Russia, with a number of others approaching that threshold. But these allocations will have since fallen considerably following the massive sale of Russian stocks.
Of the four funds that topped our list, the two actively managed had impactful positions. Barings Emerging EMEA Opportunities (BEMO) was notably ahead of the others with almost a third of its assets in Russian companies at the end of 2021, its largest geographical allocation. Gazprom (UK: GAZP) and Sberbank (UR:SBER)for example, accounted for 12% of its assets at the end of last year. He also had large allocations to South Africa and Saudi Arabia.
Fidelity Emerging Markets (FEML) had a big 17% allocation to Russia at the end of 2021, with Gazprom and CDS (UR:TCSG) among its main positions.
While shares of JPMorgan Russian Securities were oddly trading at a premium to net asset value at the time of writing, haircuts on emerging market trusts have tended to widen.
Barings Emerging EMEA Opportunities was trading at a 20.2% discount to net asset value on February 28, compared to a 12-month average discount of 11.9%. Fidelity Emerging Markets was on a 12.1% discount against a 12-month average of 8%. Templeton Emerging Markets Investment Trust (TEM)which had a much more modest 6.3% allocation to Russia at the end of January, was trading at an 8% discount roughly in line with its 12-month average.
More adventurous investors may sense a buying opportunity. But the risk and volatility could be substantial even in the longer term, and bargain hunters buy at their own risk. Callum Stokeld, research analyst at brokerage Panmure Gordon, said: “Whether these [wider discounts] represent an exceptional value opportunity or a value trap will in our view depend on whether UK-domiciled investors and investment vehicles are permitted to continue to hold assets listed in Russia.
That said, investors may have missed some nuance when assessing the bad news for Russia-exposed investment trusts. Towards the end of December, managers at Fidelity Emerging Markets indicated that they had reacted to an escalation in geopolitical tensions by adding “a short position of about 10% on the Russian index”. If they maintained this short position – a bet on falling prices – it should have offset some of the effects of falling Russian stocks on this investment trust.
Fundsmith Emerging Equity (FEET) and JPMorgan Emerging Markets Investment Trust (JMG)meanwhile, which have no reported allocations to Russia, traded at discounts deeper than their 12-month averages on Feb. 28.
Other funds with high allocations to Russia include iShares EM Dividend UCITS ETF (SEDY) and Invesco FTSE Emerging Markets High Dividend Low Volatility UCITS ETF (HDEM), which are unlikely to be held by many investors due to their niche focus. Conventional emerging market tracking funds tend to have a small portion of their assets in Russia. For example, at the end of January, funds that track the widely followed MSCI Emerging Markets Index reportedly had only around 3% of their assets in Russian equities.
How likely is this to affect the funds I hold?
Another way to process the data is to see how the exposures map to the largest emerging market funds. In theory, these names should appear more often in portfolios, which means that their allocations reach more investors. And only a handful had notable exposures to Russia before the invasion.
Among emerging market funds with assets worth at least £1 billion, Federated Hermes Global Emerging Markets Equity (IE00B3DJ5K90) held 2.88% of its assets in Russia and JPM Emerging Markets (GB00B1YX4S73) had no declared exposure at the end of January.
Corn Baillie Gifford Leading Companies in Emerging Markets (GB00B06HZN29) and open Fidelity Emerging Markets (GB00B9SMK778) had 8.3% and 7.6% allocations to Russia respectively at the end of January. Emerging Markets BlackRock (GB00B4R9F681)a fairly large fund, had an allocation of 8% to Russia at the end of January.
In a more niche part of the investment universe, the largest emerging market debt funds have also had relatively modest exposure to Russia in recent months. But that is likely to worry investors less than the immediate consequences for Russian stocks.
