Russia’s closed market after the invasion challenges US fund managers

Some US money managers with Russian securities held in funds focused on emerging markets are concerned that their investors will withdraw funds due to concerns about their exposure to Russia. If they cannot sell Russian stocks to meet demand, the funds may have to run out of cash on hand or sell other assets.

This could lead to a double whammy for emerging market managers: a reduction in the share of their money in liquid assets that coincides with an increase in the weights of their Russian holdings.

Some companies are considering asking the Securities and Exchange Commission to exempt from the maximum percentage of illiquid securities that funds can hold — currently 15% — and from the rules governing redemptions, people familiar with the matter said. A spokesman for the Saudi Electricity Company declined to comment.

Black stone company

BLK 0.87%

He is one of several money managers who have had informal discussions with SEC officials about the challenges they face and ways they can relieve the pressure.

A spokesperson for the fund manager said in a statement that BlackRock “actively consults with regulators, index providers and other market participants to help ensure that our clients can exit positions in Russian securities, when and where regulatory and market conditions permit.” He added that the company “takes all necessary measures to ensure compliance with applicable sanction laws and regulations relating to investments in Russia.”

US mutual funds and exchange-traded funds owned more than $71 billion in Russian stocks and bonds at the end of January, according to

morning star

direct estimates.

Clients of some mutual funds that hold Russian stocks and bonds attracted more money than they added last month. net flows from

Invesco Ltd.

Eves -2.12%

The developing markets fund, whose Russian stocks accounted for 7.9% of assets at the end of the year, totaled about $348 million in February, according to a preliminary estimate by Morningstar Direct. Morningstar Direct said Harding Löfner’s Institutional Emerging Markets Portfolio Fund, which invested more than 8% in Russia at the beginning of February, was $221.6 million.

Mutual funds and ETFs that 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 foundations and wealthy families.

By law, mutual fund investors are entitled to receive the closing price of their funds on the day they request to sell their shares. ETFs trade like individual stocks and can be sold at any time at the current market price.

Many managers state in their fund offering documents that they may move to limit or suspend redemptions under certain circumstances. But in practice, funds rarely take these steps.

In March 2020, . was released The Saudi Electricity Company allowed joint investment funds To borrow money from parent companies to meet the rush of refund 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 refunds Without a SEC order authorizing the relocation. The fund did so because it sought to liquidate its holdings during a difficult period for junk bonds.

The Securities and Exchange Commission adopted new rules in 2016 that require funds to review liquidity risk and hold a minimum amount of liquid securities.

Black Rock, Van Eck Associates, and

Franklin Resources company

Among the companies that have recently taken steps to address the sharp sell-off in ETFs focused on Russian stocks, modify the way new shares are created or suspend those creations. Dirksion Funds said it will liquidate leveraged Russia ETFs later this month.

Industry executives said they expect their challenges, including index collectors, to get worse

MSCI company

move to cut Russia off their standards.

MSCI said on Wednesday it would remove Russian stocks from its widely-watched emerging market indices. The company said it sought feedback from market participants and found “an overwhelming majority affirming that the Russian stock market is currently not investable and that Russian securities should be removed from MSCI’s emerging market indices.”

Funds that seek to reverse the performance of popular standards will struggle to match any changes in their Russian weightings if the market remains closed. As a result, the performance of those funds can start to stray from the performance of the indices they are trying to match.

“If they still own stocks that are not part of the index, it will lead to error tracing,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “The longer this goes on, the higher the risk that you will perform poorly.”

— Paul Kiernan contributed to this article.

write to Justin Baer at [email protected]