Russia’s invasion of Ukraine has created a dilemma for US investment firms, forcing 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 taken by the United States and other countries to punish Russia, the Moscow Stock Exchange has suspended stock trading every day this week until Thursday. Russia on Monday banned brokers from selling securities owned by foreign investors.
Some US money managers with Russian securities held in funds focused on emerging markets are worried that their investors will withdraw money because of fears of exposing them to Russia. If they cannot sell Russian stocks to meet demand, funds may be forced to run out of cash or sell other assets.
This could deal a double blow to emerging market managers: a reduction in the share of their assets in liquid assets, which coincides with an increase in the weight of their Russian assets.
Some companies are considering asking the Securities and Exchange Commission to release from the ceiling the share of illiquid securities that funds can hold – currently 15% – and the rules governing repurchases, said people familiar with the matter. An SEC spokesman declined to comment.
Conflicts such as the Russian invasion of Ukraine have historically led to lower stock prices and increased the value of some commodities. WSJ’s Dion Rabuin explains the psychology of investors that drives markets. Photo: Justin Lane / EPA / Shutterstock
BlackRock Inc. BLK 1.62% is one of the few money managers who have had informal discussions with SEC staff about the challenges they face and the ways in which pressure can be alleviated.
BlackRock “actively consults with regulators, index providers and other market participants to ensure that our clients can leave their positions in Russian securities when and where regulatory and market conditions allow,” a spokesman for the manager said. fund in a statement. He added that the company “is taking all necessary actions to ensure compliance with applicable laws and regulations on sanctions related to investments in Russia.”
US mutual funds and exchange-traded funds held more than $ 71 billion in Russian stocks and bonds at the end of January, according to Morningstar Direct.
Clients of some mutual funds that hold Russian stocks and bonds withdrew more money than they added last month. Net outflows from Invesco Ltd. IVZ -1.34% of the Emerging Markets Fund, whose Russian shares accounted for 7.9% of assets at the end of the year, amounted to about $ 348 million in February, according to a preliminary estimate compiled by Morningstar Direct. Harding Loevner’s Portfolio Fund for Institutional Emerging Markets, with more than 8% invested in Russia in early February, had outflows of $ 221.6 million, Morningstar Direct reported.
Mutual funds and ETFs, which can be purchased by individual investors, are subject to additional regulations and disclosure requirements that do not apply to private investment pools, such as hedge funds that are sold to institutions and wealthy families.
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By law, mutual fund investors have the right to receive the closing price of their funds on the day they want to sell their shares. ETFs are traded as separate shares and can be sold at any time at their current market price.
Many managers state in their bid documents that they may relocate to limit or suspend redemption under certain conditions. In practice, however, funds rarely take these steps.
In March 2020, the SEC allowed mutual funds to borrow money from their parent companies to meet the influx of repurchase requests as the market collapsed in the early days of the Covid-19 pandemic.
In 2015, Third Avenue Focused Credit Fund of Third Avenue Management LLC became the first mutual fund to stop redemption without receiving an SEC order authorizing the relocation. The fund did so as it sought to liquidate its assets during a difficult period for unwanted bonds.
The SEC adopted new rules in 2016 requiring funds to review liquidity risks and hold a minimum amount of liquid securities.
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BlackRock, Van Eck Associates and Franklin Resources Inc. are among the companies that have recently taken steps to tackle steep ETF sales that focus on Russian stocks, changing the way they create new stocks or stopping those creations. Direxion Funds said it would liquidate its leveraged ETF in Russia later this month.
Industry leaders said they expected their challenges to worsen as indexers, including MSCI Inc., sought to exclude Russia from their benchmarks.
MSCI said on Wednesday it would remove Russian stocks from widely followed indices in emerging markets. The company said it had sought feedback from market participants and found an overwhelming majority confirming that the Russian stock market could not be invested at the moment and that Russian securities should be removed from the MSCI Emerging Markets Indices. .
Funds that seek to reflect the performance of popular benchmarks will struggle to match any changes in their Russian ratios if the market remains closed. As a result, the performance of these funds may begin to deviate from that of the indices they are trying to compare.
“If they still own stocks that are not part of the index, that would lead to a tracking error,” said Todd Rosenblut, head of ETF and mutual fund research at CFRA. “The longer this lasts, the greater the risk of not presenting yourself.
-Paul Kiernan contributed to this article.
Write to Justin Baer at [email protected]
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