Russia exodus tests fund managers’ liquidity limit

A broker looks at a graph on his computer screen on the dealing floor at ICAP in London
A broker looks at a graph on a computer screen in London, Britain, January 3, 2018. REUTERS/Simon Dawson

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

Western asset managers in Russia face multiple headaches. The Moscow stock exchange has not opened this week, preventing money managers from liquidating their holdings. Though bonds are still trading, restrictions on capital movements make it almost impossible to get money out of the country read more . American exchanges have temporarily halted trading in stocks of Russia-based companies like tech giant Yandex (YNDX.O) read more , while London has frozen depositary receipts of sanctioned banks such as VTB (VTBR.MM) read more . The sudden loss of liquidity may lead index provider MSCI to boot Russian stocks out of its benchmarks.

Funds dedicated to Russia therefore have little choice but to suspend withdrawals. Asset managers with broader emerging market remits also face risks. As investors demand cash, these funds can raise money by selling investments in other markets. But this increases the proportion of remaining assets stuck in Russia, which in turn makes customers more likely to head for the exit. Though Russia accounted for just 2% of MSCI’s emerging market benchmark index as of Monday, some funds have up to 25% of their assets tied up in the country, according to Fitch Ratings.

Investors in exchange-traded funds face a different conundrum. While some Russia-focused ETFs listed in London and New York are still trading, banks can no longer effectively arbitrage differences in the value of their shares and the underlying Russian assets. As a result, big gaps have opened up. For example, the U.S.-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 open-ended funds will be forced to suspend redemptions or penalise investors withdrawing their cash. This 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.

Granted, fund managers could hardly have anticipated that Russian equities would become illiquid overnight. The scale of financial sanctions against the country is unprecedented. Once again, however, customers are being reminded that when fund managers say they can have their money back whenever they want, it’s not always the case.

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


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

- JPMorgan Asset Management suspended its Russia Equity Fund and Emerging Europe Equity Fund with immediate effect, 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 on Feb. 28 said it was seeking feedback from market participants on how to treat Russian equities in its indexes. MSCI said one option was to reclassify the MSCI Russia Indexes as so-called standalone markets, removing them from the company’s Emerging Markets benchmarks.

- MSCI’s head of index research Dimitris Melas said in an interview with Reuters that Russia’s stock market is “uninvestable” after stringent new Western sanctions and central bank curbs on trading, making a removal of Russian listings from indexes a “natural next step”.

- Russia accounted for 1.6% of the MSCI emerging markets equities index as of Feb. 28.

Editing by Neil Unmack and Oliver Taslic

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Karen reports and writes columns on global technology and venture capital sectors, with specific interests in fintech, semiconductors, food delivery and alternative food sectors. She also covers the Middle East region, mining companies and deals. She received Reuters’ 2020 best commentary award for the “SoftBank’s debt problem” investigation; moderated panels at global conferences and appeared on videos and podcasts. Prior to Breakingviews, she was a gas and power reporter at S&P Global Platts in London and covered fund management at Morningstar UK. Karen also briefly worked at China Daily Europe and Bloomberg. Born and raised in Hong Kong, she is fluent in Mandarin and Cantonese. Contact: +447721821589