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Closed Russia Challenges U.S. Fund Managers - Article / WSJ

edited March 6 in Fund Discussions
Here’s an extended excerpt from the March 4 print edition of The Wall Street Journal. Article by Justin Baer

Excerpt:

Russia’s invasion of Ukraine has created a conundrum for U.S. investment firms, pressuring them to unload Russian securities when the country’s stock market is closed and foreigners are blocked from selling shares there. In response to sanctions and other steps the U.S. and other countries have taken to punish Russia, the Moscow exchange suspended stock trading every day this week through Thursday. Russia on Monday banned brokers from selling securities owned by foreign investors.

Some U.S. money managers with Russian securities held in funds that focus on emerging markets are worried that their investors will pull money over concern about their Russian exposure. If they can’t sell Russian shares to meet the demand, funds could be forced to deplete cash on hand or sell other assets. That could deliver a double whammy for emerging-market managers: a reduction in the share of their funds in liquid assets that coincides with an increase in the weightings of their Russian holdings.

Some firms are thinking about asking the Securities and Exchange Commission for relief from a cap on the proportion of illiquid securities that funds can hold—currently 15%—and from rules governing redemptions, people familiar with the matter said. An SEC spokesman declined to comment. BlackRock Inc. is one of several money managers that have had informal discussions with SEC officials on the challenges they face and ways in which the pressure could be alleviated …

U.S. mutual funds and exchange-traded funds owned more than $71 billion in Russian equities and bonds at the end of January, according to Morningstar Direct estimates. Clients of some mutual funds that hold Russian stocks and bonds pulled more money than they added last month. Net outflows from Invesco Ltd.’s Developing Markets Fund, whose Russian stocks accounted for 7.9% of assets at year-end, totaled about $348 million in February, according to a preliminary estimate compiled by Morningstar Direct. Harding Loevner’s Institutional Emerging Markets Portfolio fund, with more than 8% invested in Russia at the start of February, had outflows of $221.6 million, Morningstar Direct said.

Comments

  • Pretty messy for sure. Just reviewed our holdings and Russian stock exposure is quite small in our already small EM funds. Pimco Income, PIMIX holds 1.5% Russian bonds. This week it loss over 2%. What about those who own EM local currency bond funds, and will those Russian debt goes to zero?
  • edited March 6
    @Sven said “What about those who own EM local currency bond funds, and will those Russian debt goes to zero?” From the same issue of The Wall Street Journal, March 4

    Article: “Some Russian Bond Trading Defrosts as Investors Hunt for Deals”

    Excerpt:

    The freeze that Western sanctions put on Russian bond markets is starting to thaw despite the looming risk of the country’s first potential default in over two decades. Resumption of trading is crucial for pension funds, insurers and money managers that are struggling to divest their Russian securities because most transactions halted when sanctions were imposed. The banks and clearinghouses that intermediate trading have resumed some activity as they try to balance their client’s needs against the risk of running afoul of current or future sanctions. For now, trading is primarily between international banks and investors in dollar-denominated government and corporate debt, fund managers said.

    The market is still in limbo for Russian treasury bonds, a component of a widely followed index maintained by JPMorgan Chase & Co. “The dollar stuff is trading but at very distressed levels. Its sellers are wanting to get rid of it at any price, and there are some buyers willing to pick it up at these levels,”said Viktor Szabo, an emerging-market fund manager at Abrdn. A Russian government dollar bond due in 2026 was quoted around 20 cents on the dollar on Wednesday, down from about 100 last week … Wall Street banks have resumed trading of some Russian corporate bonds but are demanding trades settle a day faster than usual.


  • Bloomberg says Russia will pay interest in rubles (ie TP) and "sanctions will determine if foreign bondholders get paid"

    I assume this means that most western owners will get squat.

    At the rate things are going, unless Pootin is overthrown, it will be a looooong time before any money shows up
  • edited March 6
    That would be the worst scenario in geopolitical risk! Will China buy Russian bonds as their only lifeline?

    In addition, this month's Commentary made reference to M* on bond funds with sizable exposure (8-16%) to Russian bonds.
    https://morningstar.com/articles/1081969/which-funds-had-heavy-holdings-of-russian-debt

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