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How Exposed Are Your Funds to Russia?

Much less than you would expect, but there are some outliers with heavy weightings to Russian equities among emerging Europe funds.

James Gard 28.02.2022
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As Russian invaded Ukraine, major stock markets saw heavy losses on Thursday and a number of Asian equity indexes reacted with a drop. 

For fund investors, the conflict begs the inevitable question: what’s my exposure to Russia or Ukraine? Russian funds are still niche products and unlikely to make up a large part of any diversified portfolio. If you don’t hold a direct Russian open-ended fund or investment trust, what losses can you expect? Investors will be scrambling to check their fund portfolios for Russian exposure today. Using a screen in Morningstar Direct, we have filtered out the funds available for sale in Hong Kong and/or Singapore with the biggest exposure to Russian equities in percentage terms. 

 

Emerging Europe

The list of funds that come with the highest Russian exposure in percentage terms is filled by emerging Europe funds. It comes as no surprise because of the size of the Russian economy and its footprint in eastern Europe. In the chart above, except Fidelity EMEA, all nine funds belong to the Emerging Europe Equity category. 

The largest weighting we found in absolute terms was Bronze-rated Fidelity Emerging Markets Fund, which has a fund size of US$ 5.2 billion and has 7.6% exposure to Russia. 

In percentage terms, Templeton Eastern Europe has the highest exposure, with 67.9% of the portfolio exposed to Russia. It has a Morningstar Quantitative Rating for funds (MQR) of Negative and just US$ 235 million in assets. Lukoil, Gazprom, and Sberbank make up the biggest holdings.

PineBridge Emerging Europe Equity, which has an MQR of Neutral and holds US$5.8 million in assets, is not far behind in terms of percentage exposure to Russia with a 65.9% weighting. JPMorgan Emerging Europe, which is rated Bronze by Morningstar analysts, closely follows as it has a 65% exposure to Russian equities.

 

BRICs Walled Up

When the acronym BRIC was coined in 2001 by Goldman Sachs chief economist Jim O’Neill, it communicated the excitement surrounding emerging markets in the era – BRIC stood for Brazil, Russia, India and China. Since then, Latin American equities and funds have seen massive volatility, India has thrived and China has grown significantly as a proportion of the emerging market universe.

For example, HSBC GIF BRIC Markets Equity AC has a 21.6% exposure to Russia. This Fund has only $91.0 million of assets. The portfolio is also tilted to banks and energy firms, with each sector accounting for 23% of exposure at the end of 2021, according to Morningstar Direct data. Generally though, investors have moved on from the BRICs in recent years and are now focusing on ways to play emerging markets from an ESG angle. In terms of acronyms, following the FANGS has been a much more lucrative in the last decade.

The upshot is that funds' direct exposure to Russian equities is very small. The real impact is being felt as global markets, in particular the Western European region, price in the uncertainty that Russia’s invasion has brought to investors’ minds. 

 

This article originally appeared on Morningstar.co.uk and has been slightly modified for an Asian audience

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James Gard  is content editor for Morningstar.co.uk

 

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