- Most emerging market funds had no or limited exposure to Russian equities ahead of the invasion of Ukraine
- But emerging markets investment trusts without much Russia exposure have still traded at relatively wider discounts
The dramatic news coming out of Ukraine has inevitably had a severe effect on markets. As the IC’s coverage outlines, there are consequences for a variety of major equity sectors. Unsurprisingly, Russian equities sold off extremely heavily when the news first broke with varied results across the funds universe.
Some Russia trackers and active funds such as JPMorgan Russian Securities (JRS) and Liontrust Russia (GB00B86WB793) are almost entirely focused on the market. Predictably, these have sustained huge losses so far this year. Between the start of the year and 25 February, JPMorgan Russian Securities was down 32 per cent and Liontrust Russia was down 45 per cent. Russian equities exchange traded funds (ETFs) were down by around 40 per cent over this period, proving painful for investors reported by the FT to have piled in to such funds just before the invasion.
Sheer volatility has also had some strange side effects. The bid/offer spreads on Russian equities ETFs have ballooned and on 24 February London Stock Exchange (LSEG) announced that it would allow a maximum spread of 10 per cent, double the limit that was in place during the pandemic sell-off of early 2020. In another bizarre development, JPMorgan Russian Securities' shares had moved to a premium to its net asset value (NAV) at the time of writing. This is likely to be because the investment trust's shares have not plummeted as quickly as the prices of its holdings. In a later development, the trust announced at the start of March that it had applied a "fair value" to all investments held on the Moscow Exchange, in light of a suspension of trading on the index.
More generally, extreme losses and a seizing up of the Russian market now pose existential questions for the dedicated Russia funds. With the situation escalating, multiple Russia-focused funds have suspended trading, from Liontrust Russia to JPM Emerging Europe Equity (GB00B1XMTT16) and various others. At the time of writing it seemed unclear how or when such suspensions would lift.
Emerging market funds and Russia
More mainstream equity funds tend to have limited exposure to Russian equities. Most global and European funds are generally unlikely to have any allocation to these, though a handful of emerging Europe portfolios can have hefty weightings.With a few exceptions, emerging market funds are also fairly lightly exposed.
As the chart shows, 24 funds in the Investment Association and Association of Investment Companies’ Global Emerging Markets sectors had at least 5 per cent of their assets in Russia not long before the invasion. All the figures come from fund factsheets which state the funds' positions at the end of December or January. While a 5 per cent weighting seems modest, four funds had a double-digit allocation to Russia, with a number of others approaching this threshold.
These allocations will have since substantially reduced following the sell-off in Russian equities. Some may also have sold down their allocations ahead of the recent escalation.
Of the four funds which top our list, the two actively managed ones had punchy positions. Barings Emerging EMEA Opportunities (BEMO) was notably ahead of the rest with nearly a third of its assets in Russian companies at the end of 2021, its biggest geographic allocation. Gazprom (RU:GAZP) and Sberbank (RU:SBER), for example, made up 12 per cent of its assets at the end of last year. It also had large allocations to South Africa and Saudi Arabia.
The trust has been dramatically affected by recent events: in a similar move to that made by JPMorgan Russian Securities, at the start of March the Barings trust noted that investments listed on the suspended Moscow Exchange "have been valued at zero, until such as time as the market begins to function in a way deemed appropriate".
Fidelity Emerging Markets (FEML) had a chunky allocation of 17 per cent to Russia at the end of 2021, with Gazprom and TCS (RU:TCSG) among its largest positions. But as noted below there are nuances to this.
If JPMorgan Russian Securities' shares were bizarrely trading at a premium to NAV at time of writing, discounts on emerging market trusts have tended to widen.
Barings Emerging EMEA Opportunities was trading at a 20.2 per cent discount to NAV on 28 February versus a 12-month average discount of 11.9 per cent. Fidelity Emerging Markets was on a 12.1 per cent discount versus a 12-month average of 8 per cent. Templeton Emerging Markets Investment Trust (TEM), which had a much more modest 6.3 per cent Russia allocation at the end of January, was trading on an 8 per cent 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 peril. Callum Stokeld, research analyst at broker Panmure Gordon, said: “Whether these [wider discounts] represent an outstanding value opportunity or value trap will in our view depend on whether UK-domiciled investors and investment vehicles are permitted to continue owning Russian-listed assets.”
Investors may have missed some nuances when pricing in bad news for investment trusts with Russia exposure.
Half year results for the Fidelity Emerging Markets trust published at the start of March noted that the investment managers had introduced a short position on the Russian market ahead of time, "significantly reducing" their original allocation and providing some protection in the sell-off. The team also noted that its Russian holdings had "meaningful valuation support", with diversification across various holdings.
But they still face the problem of the Russian market itself not operating. As Stifel analysts put it: "With the market not functioning, we do question the valuation of both long and short positions and the ease of unwinding those. Therefore we would view the [latest stated] gross Russian exposure of 12 per cent of the portfolio as a key number."
Elsewhere Fundsmith Emerging Equities (FEET) and JPMorgan Emerging Markets Investment Trust (JMG), which do not have stated allocations to Russia, traded on discounts wider than their 12-month averages on 28 February.
Other funds with high Russia allocations 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 trackers tend to have a small portion of their assets in Russia. At the end of January, funds that track the widely followed MSCI Emerging Markets index would have had only around 3 per cent of their assets in Russian equities.
How likely is this to affect funds I hold?
Another way to crunch the data is to see how exposures tally up in the biggest emerging market funds. In theory, these names should appear more often in portfolios, meaning that their allocations affect more investors. And only a handful had notable exposures to Russia ahead of the invasion.
Of emerging market funds with assets worth at least £1bn, Federated Hermes Global Emerging Markets Equity (IE00B3DJ5K90) had 2.88 per cent of its assets in Russia and JPM Emerging Markets (GB00B1YX4S73) had no stated exposure at the end of January.
But Baillie Gifford Emerging Markets Leading Companies (GB00B06HZN29) and open-ended Fidelity Emerging Markets (GB00B9SMK778) had 8.3 per cent and 7.6 per cent allocations to Russia, respectively, at the end of January. BlackRock Emerging Markets (GB00B4R9F681), a fairly large fund, had an allocation of 8 per cent to Russia at the end of January.
In a more niche part of the investment universe, the biggest emerging market debt funds have also had relatively modest exposure to Russia in recent months. But this is likely be of less concern to investors than the immediate consequences for Russian equities.
