By Mohneet Dhir, multi-asset product specialist, Vanguard Europe
The invasion of Ukraine by Russia is a tragic situation with an immeasurable human cost. The escalating conflict in the region is being met with significant sanctions, which will have consequences for the global economy.
When it comes to what it means for investors, it’s important to understand stock and high quality bond markets have historically been resilient to geopolitical risks over the long-term1.
At the same time, many investors are understandably asking how LifeStrategy ETFs are exposed to Russia. The funds are designed to be broadly diversified across global investment markets, including a relatively small exposure to Russian investments. At the end of January, the funds’ exposure to Russia ranged from from 0.21% in the LifeStrategy 20% Equity UCITS ETF to 0.32% in the LifeStrategy 80% Equity UCITS ETF. The funds did not hold any exposure to Ukraine as of 31 January.
LifeStrategy ETFs weathered the impacts of the Covid-19 pandemic thanks to their broad market diversification and disciplined, long-term investment approach. For the same reasons, we expect the funds to help investors ride out the expected market turbulence.
Vanguard’s LifeStrategy ETFs are comprised of Vanguard index funds that seek to replicate the risk and return characteristics of equity and bond market benchmarks maintained by index providers, such as MSCI, FTSE and Bloomberg, for example.
The most definitive index-provider moves have come from MSCI and FTSE. FTSE announced that Russia will be deleted from all FTSE Russell Equity Indices effective from the market open on Monday, 7 March. Russia index constituents that are listed on the MOEX (Russian equity index) will be deleted at a zero value, effective from the open on Monday, 7 March.
MSCI announced reclassification of Russia from ‘Emerging Markets’ to ‘Standalone Markets’ status. As a result, Russia will be dropped from Emerging Markets indices. The reclassification decision will be implemented in one step across all MSCI indices at a price that is effectively zero on the close of 9 March.
LifeStrategy ETFs hold a relatively small amount of Russian securities as part of FTSE and MSCI indices. These securities will be exiting the indices at zero value on the close of 9 March for MSCI and close of 4 March for FTSE. This will likely have a negative short-term impact on the performance of LifeStrategy funds, however we expect the impact to be offset by the funds’ broad exposure to global markets, which cushions the impact of exposure to just one country or sector.
On the fixed income side, Russian bonds have been downgraded to ‘junk’ status by rating agencies Moody’s, Fitch and S&P. This means that at the end of the March, Russian sovereign bonds denominated in USD and Russian Ruble (RUB) will be removed from the Bloomberg Global Aggregate Index. As such, they will be removed from all applicable Vanguard index and ETFs as at 31 March 2022, and ultimately LifeStrategy funds.
Given the unprecedented nature of the situation, we’re mindful that a lack of liquidity could mean Russian sovereign bonds exit the benchmark sooner. Vanguard is working closely with the index provider and other index solutions providers to assess at what price the bonds would leave the index.
Vanguard is committed to effectively stewarding the assets of our investors. The experienced investment teams that drive our LifeStrategy range of funds will continue to seek to match the risk and return characteristics of the underlying benchmarks for the LifeStrategy building blocks. The portfolio management teams are monitoring conditions closely and will make appropriate adjustments as and when it is necessary to do so.
Our risk management teams, along with our sanctions and fixed income teams, are in regular discussions – both internally and externally – to assess the ongoing situation, but many parts remain unclear at the time of writing.
All funds are open as usual and investors can buy or redeem in the normal way. All clients’ assets are safely held with third party custodians.
We understand that sometimes clients are tempted to pull out of markets until the situation passes. However, in our experience, under these conditions the best strategy is to stay invested and stay diversified, so it’s important to help clients maintain a long-term perspective and stick to the long-term strategy you have set together. As always, Vanguard is here to help you support clients through all market conditions.
1 Vanguard studied more than two dozen geopolitical events of the past 60 years. Returns based on the Dow Jones Industrial Average to 1963 and the Standard & Poor’s 500 Index thereafter. All returns are price returns and expressed in US dollar terms and do not include investment costs. Sources: Vanguard calculations, as at 31 December 2021, using data from Refinitiv.
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