The Lemon Fool

https://www.reuters.com/markets/europe/msci-ftse-russell-remove-russian-securities-their-indexes-2022-03-03/

I had been wondering when this would happen. As someone who avoids emerging markets due to concerns about Russia and China this starts to weaken three case against them.

It also shows why passive is as passive as index selection and no more.

EM exposure is difficult to entirely avoid as some companies listed on developed country stock markets have positions in EM companies. BP for example.

A good point, and of course there are earnings from sales to EM and overseas operations however I am avoiding state enterprises ran for government/party benefit and minimising exposure to Russia/China which have a history of not respecting private ownership or dramatically changing the rules for political reasons. There are some ESG benefits but I am far from an ESG investor as much as I wish to see better ethics in business.

The change is certainly interesting and with reflecting on. Indices are more influential than ever in investing making this a very interesting change in my opinion.

The counter argument would be that it's all a question of risk/reward and whether you like to try to balance them yourself.

EM stocks offer an opportunity to juice up a portfolio, which is why I hold IEER (Eastern Europe focused) which used to be about 3.5% of my portfolio. I always knew that this was risky, but I thought that Putin would be content with making trouble for Ukraine by simply menacing it aound its borders. He could have achieved 90% of his objectives at almost zero cost to Russia by just doing that. I was wrong.

IEER has quite a heavy exposure to the likes of Gazprom, Norilsk and so has cratered spectacularly, but it also holds more respectable Eastern European companies. Currently, I regard it pretty much a write-off. To counterbalance stuff like that, I also hold gold ETFs i.e. SGLN, GLD, SPGP and commodity ETFs too like AIGA (up 50% this year) and some oilies and miners as individual shares. Proponents of "buy VWRL and forget about it" may feel that "only down about 10% in the last 3 months" is relatively good. The problem imo with VWRL is that it's too exposed to large cap. USA and tech stocks, so it's not really global at at all, except on a cap. weighted basis and is not particularly well diversified over sectors either. My portfolio as a whole today is about 8.7% down on the year, which under the circumstances, I am not too dischuffed about.

IEER may partially recover. I have no idea what will happen to enterprises like Gazprom and Norilsk. In my opinion Russia will suffer huge permanent damage from this - another chapter in Orlando Figes' book 'A People's Tragedy'. I certainly won't be topping IEER up any time soon, but I think that most of the bad news is already priced in (down today 77% on what I bought it for). either.

Slava Ukrainy!
S

Impact on LifeStrategy:

https://www.vanguardinvestor.co.uk/arti ... -investors

spasmodicus wrote:The counter argument would be that it's all a question of risk/reward and whether you like to try to balance them yourself.

EM stocks offer an opportunity to juice up a portfolio, which is why I hold IEER (Eastern Europe focused) which used to be about 3.5% of my portfolio. I always knew that this was risky, but I thought that Putin would be content with making trouble for Ukraine by simply menacing it aound its borders. He could have achieved 90% of his objectives at almost zero cost to Russia by just doing that. I was wrong.

IEER has quite a heavy exposure to the likes of Gazprom, Norilsk and so has cratered spectacularly, but it also holds more respectable Eastern European companies. Currently, I regard it pretty much a write-off. To counterbalance stuff like that, I also hold gold ETFs i.e. SGLN, GLD, SPGP and commodity ETFs too like AIGA (up 50% this year) and some oilies and miners as individual shares. Proponents of "buy VWRL and forget about it" may feel that "only down about 10% in the last 3 months" is relatively good. The problem imo with VWRL is that it's too exposed to large cap. USA and tech stocks, so it's not really global at at all, except on a cap. weighted basis and is not particularly well diversified over sectors either. My portfolio as a whole today is about 8.7% down on the year, which under the circumstances, I am not too dischuffed about.

IEER may partially recover. I have no idea what will happen to enterprises like Gazprom and Norilsk. In my opinion Russia will suffer huge permanent damage from this - another chapter in Orlando Figes' book 'A People's Tragedy'. I certainly won't be topping IEER up any time soon, but I think that most of the bad news is already priced in (down today 77% on what I bought it for). either.

Slava Ukrainy!
S

I agree with everything you have said and have even had the conviction to make allocation calls in the past. Asia and small cap (especially UK small cap) were my biases. I am sorry to hear that your Eastern European investments haven't had a good time recently but am heartened that your portfolio has performed well overall.

Although I am almost exclusively passive now I think things like choice of benchmark and acceptance of the construction and management of trackers and indices are all to some extent active decisions although after the initial selection we are deferring to others. My active calls include selecting MSCI World rather than an All World index. This isn't based on a belief that truly active out performance is impossible, rather it is based on decreasing confidence in my ability to select winners in advance. To those who construct better performing portfolios I take my hat off!

I now sit here comfortable that I can ride out the drops in MSCI World as I am confident that I probably wouldn't do better (even though I have been lucky enough to back some people in the past who have e.g. Fundsmith, BRSC, etc.). My next challenge is market timing for moving from 90:10 to 75:25. Now that's one that does trouble me.

Slava Ukrainy!

AWOL wrote:My next challenge is market timing for moving from 90:10 to 75:25. Now that's one that does trouble me.

89:11 in 1 years time, 88:12 in 2 years time, 87:13 in 3 years time... ?

Here are some interesting comments on ETFs with Russian content, written on 8 March
https://www.etfstream.com/features/russia-stock-market-collapse-leaves-etfs-in-unprecedented-position/

Russia ETFs continue to trade on the SIX Swiss Exchange and act as a source of price discovery. Demand for Russia exposure remains high with CSRU, for example, currently trading at a 151% premium to NAV despite being down 34% so far on 7 March.

The SIX exchange subsequently suspended trading in ETFs with high Russian content, so price discovery now is presumably not possible.
Whilst this is probably not the right thread to discuss potential opportunities arising from the Russia situation, one might speculate as how the other non-Russian assets that some of these ETFs contain might be valued or even traded in some way. More generally this is a situation that could occur in other parts of the world, e.g. Latin America (remember PDVSA debt?). I wonder how much exposure an ETF has to have before it becomes vulnerable to such suspension and how other ETFs which continue to trade with small exposure to Russian stocks deal with the situation?

S

AWOL wrote:
It also shows why passive is as passive as index selection and no more.

Not quite.

Stock selection withing an index can also be subjective. In effect investing is moving from being controlled by a few "super hero" fund managers to faceless committess of who we know nothing and have even less control over.

OhNoNotimAgain wrote:

AWOL wrote:
It also shows why passive is as passive as index selection and no more.

Not quite.

Stock selection withing an index can also be subjective. In effect investing is moving from being controlled by a few "super hero" fund managers to faceless committess of who we know nothing and have even less control over.

The index providers are much cheaper than the fund managers, and in most cases they are making mechanical decisions.

For holders of suspended ETFs having a Russian component, like IEER which I hold, this notice from Blackrock provides some clarification

https://www.blackrock.com/uk/literature/shareholder-letters/ishares-plc-msci-eastern-europe-capped-ucits-etf-shareholder-letters-june-2022-emea-en.pdf

I hope to get something back, at least for the components of IEER that weren't Russian, which I think originally amounted to about 45%.

Share prices of lots of companies that pulled out of Russia will have been affected to some extent by the Russian-Ukrainian war, e.g. Shell and BP who had to write of their Russian assets, or sell them at a knock-down price. Good thing that they are internationally diversified.
If you held Norilsk NIckel directly, for example, you'd be 100% exposed. Eggs in one basket and all that.

S

Given how many ETF's there are nowadays I wouldn't be surprised to see the emergence of a Pariah States ETF. North Korea, Russia, Belarus, Zimbabwe.