Russian exodus tests fund managers’ liquidity limit


A broker looks at a chart on a computer screen in London, Britain January 3, 2018. REUTERS/Simon Dawson

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LONDON, March 2 (Reuters Breakingviews) – The Russian crisis is providing fund managers with another test of their liquidity limits. With the Moscow stock exchange frozen, companies such as JPMorgan (JPM.N) and Amundi (AMUN.PA) have suspended redemptions of funds worth more than $4 billion. It’s another reminder of the fragility of asset managers’ promise that clients can withdraw cash whenever they want.

Western asset managers in Russia face multiple headaches. The Moscow stock exchange did not open this week, preventing fund managers from liquidating their holdings. Although bonds are still trading, restrictions on capital movement make it nearly impossible to get money out of the country. US stock exchanges temporarily halted trading in shares of Russian-based companies like tech giant Yandex (YNDX.O) read more , while London froze certificates of deposit from sanctioned banks such as VTB (VTBR. MM) find out more. The sudden loss of liquidity could lead index provider MSCI to exclude Russian stocks from its benchmarks.

Funds dedicated to Russia therefore have little choice but to suspend withdrawals. Asset managers with broader expertise in emerging markets also face risks. As investors require liquidity, these funds can raise funds by selling investments in other markets. But it increases the proportion of remaining assets stuck in Russia, making customers more likely to head out. Although Russia made up just 2% of MSCI’s emerging markets benchmark on Monday, some funds have up to 25% of their assets tied up in the country, according to Fitch Ratings.

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Investors in exchange-traded funds face another conundrum. While some Russia-focused ETFs listed in London and New York are still being traded, banks can no longer effectively arbitrate differences in the value of their stocks and underlying Russian assets. As a result, large gaps opened up. For example, the US-listed iShares MSCI Russia ETF closed at $12 on Tuesday, less than half the net asset value of its investments at the end of last week.

As the crisis drags on, more and more open-end funds will be forced to suspend redemptions or penalize investors who withdraw cash. It has happened before: several UK property funds put up so-called gates after Britain voted to leave the European Union in 2016, and again at the start of the pandemic in 2020.

Admittedly, fund managers could hardly have predicted that Russian stocks would become illiquid overnight. The scale of the financial sanctions against the country is unprecedented. Once again, however, clients are reminded that when fund managers say they can get their money back whenever they want, that’s not always the case.

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(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)

BACKGROUND NEWS

– Asset managers including Amundi, HSBC, BNP Paribas and Switzerland’s Pictet announced on March 1 that they had suspended trading in funds containing Russian stocks. Ratings agency Fitch has identified 11 Russia-focused funds that have been suspended, with total assets under management of 4.4 billion euros ($4.9 billion) at the end of January.

– JPMorgan Asset Management has suspended its Russia Equity Fund and Emerging Europe Equity Fund effective immediately, the company said in a letter to its investors on Feb. 28. This prevents investors from redeeming, switching or buying shares in the funds.

– Index provider MSCI said on Feb. 28 that it was seeking feedback from market participants on how to treat Russian stocks in its indices. MSCI said one option was to reclassify the MSCI Russia indices as so-called standalone markets, removing them from the company’s emerging markets benchmarks.

– Head of index research at MSCI Dimitris Melas said in an interview with Reuters that the Russian stock market was “uninvestable” after tough new Western sanctions and central bank restrictions on trading, making the removal of Russian listings from indices a “natural next step”.

– Russia accounted for 1.6% of the MSCI Emerging Markets Equity Index as of February 28.

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Editing by Neil Unmack and Oliver Taslic

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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