With the terrible situation that has been unfolding in Ukraine since late February, several Sensible Financial clients have wondered whether their portfolios hold Russian securities.
To answer this question, a quick review of Sensible Financial’s investment philosophy is in order. There are two elements to that philosophy that are pertinent to this question. One, for most clients, we recommend broadly diversified mutual funds and exchange-traded funds (a kind of mutual fund), rather than direct ownership of bonds or stocks. As a result, holdings of any Russian securities would be within the mutual funds and ETFs that we recommend. Two, we recommend passively managed funds. Passively managed funds are ones in which securities are selected based on an index, or an index with certain “factor” modifications. This is important to know because the funds’ underlying holdings are driven by (or heavily influenced by) whether those securities are in the associated indices.
Russia’s role in those indices has been steadily falling for more than a decade, as a result of recession and various government sanctions. That can be seen by examining the country’s weighting in one of the leading emerging markets indices, the MSCI Emerging Markets Index:
So even before Russia’s invasion of Ukraine, the country had fallen to a relatively insignificant role in the global capital markets.
In early March, following the late February invasion of Ukraine, leading market index providers removed or limited the presence of Russian securities in their indices. This included MSCI, S&P, FTSE, and Bloomberg.
At the same time, prominent mutual fund companies reduced or eliminated their holdings of Russian securities, as described in announcements from Vanguard and Dimensional Fund Advisors:
- Vanguard: According to their March 9, 2022 announcement, “Vanguard has suspended purchases of Russian securities across our actively managed funds and is working to further reduce our exposure to Russia and exit the positions across our index funds. And, of course, Vanguard funds will continue to adhere to sanctions.”
- Dimensional Fund Advisors: “On March 2, 2022, we announced that our Investment Committee removed Russia from our list of approved markets for investment. Our plan is to divest all Russian holdings from our portfolios as market conditions allow.”
Turning our attention to your portfolio, Russian securities could be held in two components of portfolios managed by Sensible Financial: the emerging markets allocation (roughly 10% of equity holdings) and the international bond allocation (roughly 20% of fixed income holdings). Consistent with the trends described above, Russian securities’ weightings in the funds representing these asset classes has fallen, and is now zero, or very close to it. For instance, in the Fidelity Emerging Markets Index Fund, Russia represented 2.4% of the assets a year ago, and comprised 0.08% of assets on March 31st. Similar declines have been seen in the funds we recommend from Dimensional and Vanguard.
When one brings together the relatively small allocation to international bonds and emerging markets stock, and then the tiny presence of Russian securities in those funds, we estimate that portfolios managed by Sensible have at most 0.003% of their assets in Russian securities (in other words, three cents out of every $1,000). This is based on the latest holdings data available, which in some cases is March 31st. We expect that the allocation to Russia will have fallen even further by the time holdings are next released by the fund companies.
Please contact your Sensible Financial advisor with any questions.
All written content is provided for information purposes only. Opinions expressed herein are solely those of Sensible Financial and Management, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources, but no representations are made by our firm as to other parties’ informational accuracy or completeness. Information provided is not investment advice, a recommendation regarding the purchase or sale of a security or the implementation of a strategy or set of strategies. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.