Major index providers MSCI and FTSE Russell have dropped Russian stocks from all equity benchmarks citing ‘uninvestable’ conditions with decisions still pending on bond exclusions.
Both MSCI and FTSE Russell announced the index changes following moves by the Russian stock exchange and central bank that effectively prevented non-resident access to markets.
Russia shares exit the FTSE Russell indices today (Monday March 7) with the MSCI adjustment due on March 9.
“The reclassification decision will be implemented in one step across all MSCI Indexes, including standard, custom and derived indexes, at a price that is effectively zero and as of the close of March 9, 2022,” MSCI said in a statement.
S&P Dow Jones Indices – the remaining big-three benchmarker – looks likely to follow suit, noting last week that: “The sanctions and subsequent impact on the accessibility of the Russian market may impact the ability of market participants to replicate S&P DJI Indices containing Russian securities.”
The index changes will affect passive products linked to the respective benchmarks as well as encouraging a broader boycott of Russian stocks in the wake of the Ukraine invasion that has already seen many institutional investors across the world ditch holdings.
For example, last week a coalition of NZ government funds revealed plans to sell down most of their Russian equities and bonds “as market conditions permit”.
According to a NZ Superannuation Fund (NZS) spokesperson, the exit from most directly owned Russian shares would take place “as soon as the exchange is open and we can clear the sales”.
“It’s not a price thing,” the spokesperson said.
NZS has already dispatched its Russian bonds. The fund may also have exposure to Russia-based investments via third-party collective investment vehicles.
Global sanctions against Russia should “see the securities exit the pooled funds”, the NZS spokesperson said.
“We are checking with our managers if this is the case.”
However, the NZS exclusion effort – a joint mission with the Accident Compensation Corporation fund, the Government Superannuation Fund and the National Provident Fund – only covers sovereign bonds and any “securities of majority Russian state-owned enterprises from their respective funds”.
Many other global sovereign wealth funds have also moved to dump Russian assets including the Australian Future Fund, which released plans to sell down A$200 million of securities last week.
At the same time a raft of KiwiSaver schemes – such as AMP, ANZ, ASB, BNZ and Westpac – and Australian superannuation funds have either sold, or committed to sell, their Russian holdings.
But scrubbing Russian securities from all portfolios may not be that simple, especially for those investing in passive pooled funds that must follow index weights.
The MSCI and FTSE Russell calls to cut Russian stocks from indexes should ease the way for passive equity benchmark-trackers – including exchange-traded funds – to comply.
To date, though, providers have yet to exclude Russia from bond indices, leaving linked products exposed to the country.
For example, both Simplicity and ASB (through its Positive Impact Fund) have some Russian holdings through their investments in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund, which follows a Bloomberg MSCI benchmark. The latest update for the Vanguard fund reports a 0.3 per cent holding in Russian government bonds.
In an update to members last week, Simplicity says its “holdings of Russian Government debt are very small”.
“For example, on a $50,000 investment in our KiwiSaver Growth Fund, the total holdings of Russian Government debt would be $15, i.e. 0.03%,” the Simplicity note says.
Simplicity has been “speaking to Vanguard directly to impress on them the urgency of the situation”, although the decision hangs entirely with the index provider.
“And in any event, Russian Government debt is no longer investment grade, so must be removed anyway,” Simplicity says.
MSCI has yet to release a decision on how it would treat Russian bonds in relevant indices. In its release, FTSE Russell says it “continues to evaluate the impact to the Fixed Income indices of sanctioned entities for non-sovereign issuers and will provide a further update in due course”.
The arguments may be largely academic with Russian securities either difficult or impossible to offload right now. Quoting a portfolio manager for Pictet Asset Management, Bloomberg reported last week that as investors try to sell Russian bonds they will “probably have close to no value and it’ll probably be the same for stocks”.