As the war in Ukraine progresses and Russia becomes increasingly more isolated from global economies due to severe financial sanctions, the institutional investment industry is shedding its exposure to Russian assets – or at least aiming to – in response to the invasion of Ukraine, which is now in its fifth day and seeking a ratcheting up of sanctions by the US and allies.
The Norwegian government said yesterday that its finance minister will ask the Government Pension Fund Global (GPFG), which is managed by an arm of the central bank, to freeze all its investments in Russia immediately, and ask the NOK11.6trn (€1.2trn) sovereign wealth fund to divest from Russia.
The announcement was made as part a package of support for Ukraine, including the provision of military equipment.
Minister of Finance Trygve Slagsvold Vedum said: “Given the way the situation has evolved, we consider it necessary for the fund to divest its Russian assets.”
According to Norges Bank Investment Management’s website, at the end of 2020, the GPFG had NOK23.3bn invested in Russian equities with a further NOK6.7bn in Russian bonds. Together, these holdings amounted to 0.3% of the fund, according to the data.
In a statement today the finance ministry noted that Russia had announced a unilateral ban on the sale of shares on the Moscow Stock Exchange and that the sale of shares could therefore take some time.
Elsewhere in Norway, KLP announced today that it has now frozen all its investments in Russia, and that 22 companies – including Sberbank of Russia, Gazprom and Rosneft Oil – will be excluded from investment by KLP and its mutual funds division with effect from this month.
In a statement, the Norwegian municipal pensions provider said: “KLP and the KLP mutual funds do not exclude investments at the country level, and assessments must be linked to the specific companies.
“However, there are extraordinary circumstances linked to the risk of rights violations in situations of war and conflict, the introduction of a wide-ranging sanctions regime and the Norwegian government’s decision to divest the GPFG’s investments which, assessed as a whole, mean that we have decided to exclude all investments in Russia.”
KLP said that including the mutual funds business, it had just under NOK500m invested in these companies.
The institutional investor said there was a major risk that the firms were being used to supply energy or materials to the Russian armed forces, or in other ways finance the war.
“In addition, Russia’s head of state has strong control of the country and can, in principle, use all available means to drive through disproportionate decisions. A lack of independent control mechanisms constitutes a significant risk,” KLP said.
Bans and exclusions
This morning the Swedish Pensions Agency announced an immediate halt on savers buying into specialist Russian funds on the premium pension fund marketplace it operates – although it was not stopping people from selling off holdings in such funds.
Erik Fransson, head of the fund marketplace department at the Swedish Pensions Agency, said: “We are stopping the possibility of buying the funds that most strongly focus on investments in Russia. This is being done to protect pension savers.”
The agency said the ban was being introduced to investigate the funds’ continued suitability on the fund marketplace.
“The inquiry concerns the fund agreement text on suitability and appearance, among other things, at counterparty risks, operational risks and the funds’ return and risk profile,” the agency said, and named four Russia funds run by Swedbank Robur, Nordea, Carnegie and East Capital as being affected by the ban.
This follows the pension fund’s statement a month ago – when tension was escalating as Russian troops were stationed along Ukraine’s borders in large numbers – that it would immediately exclude Russian government bonds and shares in Russian state-controlled companies if the country invaded or attacked its neighbour.
Jens Munch Holst, chief executive officer of AkademikerPension, said: “The invasion is a clear and unequivocal violation of international laws and regulations and of our policy of responsible investment. Therefore, there is no other consequence than to exclude Russia.”
The pension fund said the exclusion meant it would sell securities worth DKK304m (€40.9m), constituting 0.2% of its total portfolio.
Back in January when AkademikerPension made the warning about potential divestment, it put the value of the assets in question at $61m (€54.5m).
Sweden’s biggest pension fund Alecta told IPE it has no investments in state-owned Russian companies, or Russian government debt, no plans to invest – and neither does it have any investments in other Russian companies.
Hans Sterte, Alecta’s CIO, said: “The war in Ukraine is above all a human catastrophe, where any financial effects today feel less important.
“Now, during the start of the war, Alecta is mainly refraining from making any portfolio changes at the strategic level,” he said, adding that also, the uncertainty about future developments was too great.
Sterte said the fund had no direct exposure either to Russia or Ukraine. “Our pension portfolio is managed with a very long time horizon and it is structured in such a way that it can withstand disturbances in the financial markets, disturbances that arise with a certain frequency.”
In Denmark, Sampension said it had already excluded Russia from its investment portfolio back in April 2021, so its customers’ pension savings were not invested in Russian government bonds or state-controlled Russian companies.
In the UK
A spokesperson for the Church of England today told IPE that on Thursday, in response to the attack on Ukraine by Russian and supporting sanctions announced by the UK and other governments, the Church Commissioners and the Church of England Pensions Board both issued instructions to their managers to exit all of the funds’ current direct holdings in Russian companies and to make no further investments in Russian companies.
The spokesperson said that before issuing this instruction, holdings across portfolios in Russian companies represented approximately 0.16% of total investments, with no investments held in Russian sovereign debt.
For Cushon Master Trust, an expanding multi-employer defined contribution pension scheme in the UK, the outbreak of war in Ukraine comes as it has launched a new investment strategy, including a multi-assets private markets portfolio for investment in developed and emerging markets.
A spokesperson for Cushon told IPE: “The situation in Ukraine is rapidly evolving, we’re monitoring the situation closely along with our investment managers and will take necessary actions to protect our members’ funds should the need arise.”
Uncertainty, volatility and financial sanctions
The Russian equity market has dropped “massively in value” since the beginning of the year, global markets uncertainty has increased, and in segments of the bond market liquidity has sharply declined, Swiss consultancy PPCmetrics said in a paper analysing the implications of the war in Ukraine for investors, primarily Pensionskassen.
PPCmetrics has calculated investors’ exposure to Russian and Ukrainian assets since the beginning of the crisis, estimated at 0.84% – 0.15% for global bonds, 0.51% emerging market bonds and 0.18% equities.
It noted that Russia is not included in the MSCI World index, but only in the MSCI All Country World index with emerging market equities. Ukraine is neither included in the MSCI World index nor in the MSCI All Country World index.
Russia and Ukraine represent a relatively small share in the equity and bond indices, but investors may feel the impact of the war directly if they have a high share of investments in Russia, which is currently linked with negative returns and limited liquidity.
The indirect effects at portfolio level include global markets uncertainty leading to high volatility, whereas the indirect effects at trade level, of financial sanctions – for example, with a ban on Russian securities – can lift up illiquidity of portfolios, it said.
Since the beginning of the year, Swiss Pensionskassen have lost on average 3.8% in returns, according to the PPCmetrics Pension Ticker. The funding ratio stood at 116.49%, well above the 100% mark.
Speaking about the impact of the war and of the current financial sanctions, the authors of PPCmetrics’ research paper Stefan Skaanes and Luzius Neubert told IPE that “Swiss Pensionskassen are primarily affected by the current significantly increased market volatility and limited market liquidity.”
“Many pension funds are currently working with their partners such as asset managers and custodian banks to clarify whether there will be additional operational consequences for them in connection with the sanctions [against Russia],” they added.
Swiss pension funds usually design their investment strategies based on their risk capacity and stick to it whenever possible, even in situations of crisis.
“Rebalancing or tactical adjustments are conceivable if the current limited market liquidity allows,” the authors said.
For investors, short-term readjustments of portfolios are associated with challenges, PPCmetrics said, adding that a staggered rebalancing may make sense in situations of high market volatility, high levels of uncertainty or limited liquidity.
Under the new package of sanctions imposed by the EU “important Russian banks” will be excluded from the SWIFT system, the EU Commission’s president Ursula von der Leyen said yesterday.
The EU will also ban the transactions of Russia’s central bank and freeze all its assets to prevent it from financing Putin’s war, she added.
With new sanctions in place, external asset managers should assess whether they can still fulfil their contracts, while investors should clarify the role of internal asset management, especially in case of single-investor funds, it said.
For passive management, PPCmetrics recommends keeping an eye on any index adjustments.
In Belgium
At KBC Pensioenfonds in Belgium, CIO Luc Vanbriel told IPE that most of the pension fund’s exposure to Russian shares and bonds had been sold during the past few days, and that “what’s left is apparently difficult to sell”.
He said the equity exposure had already been fairly limited as Pensioenfonds KBC has a MSCI World All Countries benchmark and the weight of Russia is very limited.
The pension fund used to have a benchmark that was half MSCI EMU and half MSCI World ex-EMU, but in 2020 it decided to abandon the EMU home bias.
“The bond exposure was limited as well as the position in emerging market bonds was less than 2% before the Ukraine crisis started,” Vanbriel added.
The CIO also noted that Pensioenfonds KBC has implemented an LDI strategy for its €2.4bn DB operations since 2007 and that although the increased inflation protection it put in place in 2017 had not previously added much value, “it does now”.
Meanwhile, in its DC plans – of around €500m – KBC had a portfolio insurance overlay to protect against equity markets falling off a cliff. On 7 February the portfolio sold about 12% of its equity exposure, Vanbriel said.
Still good global economic growth
PFA’s chief strategist Tine Choi Danielsen said in a market commentary on Thursday that the pension provider – the largest commercial pension fund in Denmark – did not hold any Russian shares.
But she noted that events around the war in Ukraine had pushed up oil and gas prices.
“Conversely, the trend has at least temporarily reversed the trend in rising interest rates, as we see falling interest rates in both the US and Europe over a relatively broad spectrum,” she said.
There was still good global economic growth, she said, adding that this was amplified in the US and Europe and other parts of the world which were lagging following the pandemic.
“The positive economic growth is generally supportive of the stock market and against that background we find it difficult to see that the stock markets will fall by more than 5-10% from the current level,” she said.
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