In light of the sell offs and western sanctions, Morningstar examines changes in emerging markets portfolios. Morningstar analysts have been in touch with managers of rated global emerging-markets funds for their thoughts on the market ramifications and the actions they’ve been taking in their portfolios.
“As expected, Russian equities sold off heavily when the news of the crisis first broke. Some portfolio managers with exposure to Russian equities have significantly reduced allocations. Others have adjusted the assumptions of their investment theses and valuation estimates but retained their holdings. In some cases, it is both. MSCI has also announced that, effective 9 Mar 2022, the Russian market will be removed from its emerging markets indexes. The ability to trade these shares is now pretty much impossible.
Mainstream global emerging markets equity managers tend to have limited exposure to Russian equities. Because of this, there hasn’t been a need to suspend dealing, and managers have reported relatively normal trading conditions in terms of investor inflows and outflows. However, as daily dealing funds need to produce daily net asset values, pricing Russian holdings has now become an issue. Where no vendor prices for Russian stocks or their corresponding GDRs are available, some asset managers have stated that they will look to apply the percentage change of Russian index exchange-traded funds, or ETFs, as a marker for the performance of those positions.” – Samuel Meakin, Associate Director of Equity Fund Strategies, Morningstar.
Key takeaways on the impact on Global Emerging Markets Funds:
- Amongst fund managers, the situation remains highly uncertain. Managers remain watchful for where there may be further impacts regarding sanctions.
- GQG Partners Emerging Markets Equity, has dramatically reduced its exposure to Russia. The fund’s stake had been about 16% of assets in December 2021, according to fund disclosures, but at this more recent date, the firm reported it had only about 3.7% of assets left in Russia.
- Fidelity Emerging Markets came into the crisis with an overweight Russia position relative to its MSCI Emerging Markets Index prospectus benchmark (7.6% versus 3.3% as of the end of January 2022). They have since managed to trim their exposure, with Russian equity exposure now totalling around 2% and comes via five individual holdings: Sberbank, Gazprom, TCS Group, Novolipetsk Steel, and Phosagro.
- James Syme, manager of Bronze-rated JOHCM Global Emerging Markets Opportunities, has substantially reduced commodities exposure. At the end of January, the fund’s allocation to Russia was around 4.7%, representing a 1.4% overweighting relative to the index, through positions in Gazprom GDRs (2.3%), Sberbank GDRs (1.7%), and Globaltrans GDRs (0.7%). Exposure has since fallen: For example, Sberbank has been sold, and the manager has stated at time of writing that the portfolio had no exposure to suspended securities.
- Some managers came into the crisis with an underweight position in Russia, such as JPM Emerging Markets, managed by Leon Eidelman. The strategy has historically been underweight in energy and materials firms relative to the index. These names tend to be avoided because they are commodity-price sensitive, therefore lacking pricing power, and are deemed unattractive from a corporate-governance perspective. At the end of January, the fund’s only Russia exposure was its 1.1% position in Sberbank; by the end of February, the fund had no exposure to the country.
- Sberbank, one of the more widely held Russian stocks, is one of the sanctions’ biggest targets because the state owns half of it. The bank has managed to operate under the capital-raising and debt-selling limits of sanctions imposed after Russia’s 2014 annexation of Crimea and activity in eastern Ukraine. The restrictions levelled last week prevent the institution from transacting with U.S. banks (European banks are expected to ordain similar injunctions), which could affect its intrinsic value. That value could fall even further if the bank is one of the institutions removed from SWIFT.
- Brandes Emerging Markets Value doesn’t necessarily believe that value has been permanently impaired at Sberbank, given it is still Russia’s dominant bank, with a strong balance sheet supported by mostly local deposits and a 22% return on equity. As an alternative to SWIFT, Russia could resort to its own payment system or China’s network.
- Invesco Developing Markets’ Russia stake shrank to about 4% as of late February, from 9% at the end of 2021. Despite the turmoil, the fund manager still likes the two stocks that accounted for 80% of the fund’s Russia exposure—Yandex and Novatek— which have both plunged.
