Hungarians take part a demonstration against Russian aggression in Ukraine on March 1, in Budapest.FERENC ISZA/AFP/Getty Images
The push to remove any trace of Russian assets from Canadian portfolios is at an impasse, with the global financial system increasingly unwilling to handle the toxic securities.
Exposure to Russia, while minimal in dollar terms, is spread widely across Canadian investment funds.
Before Russia became a pariah state as a result of its invasion of Ukraine, most emerging-market funds that track diversified global indexes had to carry a Russian component – typically 3 per cent to 4 per cent of assets.
Canadian asset manager Purpose Investments divests of direct holdings of Russian companies
Wall Street pushes on with measures to remove Russian assets
In addition, several actively managed Canadian funds went into the year with stakes in popular Russian stocks, such as banks and oil companies, some of which have since been put on Canada’s sanctions list.
Those shares may now be unsellable and effectively worthless. Last week, the Central Bank of Russia implemented a ban on the sale of local securities by foreign investors, while major global settlement systems that handle transactions have stopped accepting Russian assets.
“It’s really frustrating for a lot of people because they want to do the right thing, but it’s now practically impossible,” said Greg Taylor, chief investment officer at Purpose Investments. “The liquidity options are getting thinner and thinner every day.”
Purpose started scouring its funds for assets linked to Russia, and were relieved to discover no direct Russian securities, Mr. Taylor said.
They did find holdings in some Russian ETFs trading in the United States, as well as some Canadian companies with considerable operations in Russia, such as Kinross Gold Corp., which derives almost one-quarter of its output from the Kupol mine in Siberia. Kinross has announced that it is suspending its Russian activities.
Purpose decided to divest all of the above on Thursday, while rallying others in the industry to do the same. “All your investors are looking for clarity,” said Som Seif, Purpose’s chief executive officer. “It’s a big positive to be able to signal that you have no exposure.”
And yet, few can truly make that claim, even after Russia is carved out from the big global stock benchmarks.
Last week, S&P Dow Jones Indices, MSCI Inc. and FTSE Russell all announced the removal of the Russian market from their indexes, which are tracked by funds holding trillions of dollars around the world.
The move gives many firms a way to distance themselves from the securities of entities controlled by the Russian government.
“Rather than try to sell Russian securities into a market with no buyers, fund managers can just write them down to zero, put the securities aside and focus on the remainder of the portfolio,” said Daniel Straus, director of ETFs and financial products research at National Bank Financial.
Those fund managers can at least tell their unit holders they no longer have any beneficial interest in the Russian market. But that doesn’t make those securities disappear.
“At the back-office level, those parent firms will have on their hands a stash of radioactive holdings,” Mr. Straus said. “The record of ownership has to pass somewhere and be accounted for. It may take months or years before their ultimate fate is decided.”
Direct Russian holdings are an even trickier matter.
Going into the year, the Russian market was an attractive, if risky and controversial, prospect for emerging-market investors.
“[Stocks] traded well below historical averages, incremental earnings growth looked promising and the country carried one of the strongest … economic backdrops in the world,” said Malcolm Dorson, senior portfolio manager at Mirae Asset Global Investments, which manages emerging-market products for Horizons ETFs.
The shock of the attack on Ukraine, as well as the speed of the Western response in the form of economic sanctions to try to isolate Russia financially, probably caught many investors off guard, Mr. Straus said. And now they are stuck with assets linked to the Russian war effort.
“Most large global investment managers will have some exposure in some way, shape or form,” said Paul Moroz, chief investment officer of Mawer Investment Management Ltd.
In the weeks before the invasion, Mawer was reducing its Russian holdings, which accounted for 2.3 per cent of its emerging markets equity fund as of the end of February. The firm said it plans to exit all Russian securities as soon as feasible.
“On many Russian securities, brokers aren’t taking orders, and even if they were, I’m not sure this stuff could clear,” Mr. Moroz said.
The broker-dealers that engage in trading activity have concerns about violating sanctions, in addition to the risk of being saddled with trades that may never settle.
For Canadian investors looking for a way out, the exits are all blocked.
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