By Jack Kraft, CFA, Advisor Directed Portfolio Analyst
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Diversified portfolios allow investors to reap the benefits of having exposure to global financial markets. This allows investors to spread geopolitical risks across different parts of the world. However, in times of uncertainty geopolitical risk can become heightened and may cause abnormal market volatility. As the Russia-Ukraine crisis unfolds, the stock market in Russia has taken a nosedive amid stringent financial sanctions from some the world’s largest economies. As of March 1, the Russian stock market was closed due to these sanctions. Additionally, some index providers – such as the MSCI – have indicated that the Russian stock market is “un-investable” at the present time and that could lead to the removal of Russian listings from their indices. This leads investors to question what exposure, if any, they may have to Russian financial markets.
Russia is considered an emerging market and therefore emerging market fund managers will have natural gas, energy, and other Russian related stock exposure. Typically, this exposure is minimal with the MSCI Emerging Market Index having roughly a 2% allocation to Russian public companies. For example, the most aggressive BFE Asset Allocation model (Aggressive Growth) suggests an 8% portfolio allocation to the emerging markets asset class. If an everyday investor had an 8% allocation to the MSCI Emerging markets index, their exposure to Russia would be less than two-tenths of one percent. In regard to the portfolios managed by Benjamin F. Edwards (Mutual Fund, Active Passive, and ETF Portfolios), the Investment Strategy Committee observed minimal exposure to Russian publicly traded assets in the funds being used in these models.