WSJ News Exclusive | A Closed Russia Market After Invasion Challenges U.S. Fund Managers

Russia’s invasion of Ukraine has created a conundrum for U.S. investment firms, pressuring them to unload Russian securities when the country’s stock market is closed and foreigners are blocked from selling shares there.

In response to sanctions and other steps the U.S. and other countries have taken to punish Russia, the Moscow exchange suspended stock trading every day this week through Wednesday. Russia on Monday banned brokers from selling securities owned by foreign investors.

Some U.S. money managers with Russian securities held in funds that focus on emerging markets are worried that their investors will pull money over concern about their Russian exposure. If they can’t sell Russian shares to meet the demand, funds could be forced to deplete cash on hand or sell other assets.

That could deliver a double whammy for emerging-market managers: a reduction in the share of their funds in liquid assets that coincides with an increase in the weightings of their Russian holdings.

Some firms are thinking about asking the Securities and Exchange Commission for relief from a cap on the proportion of illiquid securities that funds can hold—currently 15%—and from rules governing redemptions, people familiar with the matter said. An SEC spokesman declined to comment.

Conflicts such as Russia’s invasion of Ukraine have historically sent stock prices lower and boosted the value of certain commodities. WSJ’s Dion Rabouin explains the investor psychology that is moving markets. Photo: Justin Lane/EPA/Shutterstock

BlackRock Inc.

BLK 3.25%

is one of several money managers that have had informal discussions with SEC officials on the challenges they face and ways in which the pressure could be alleviated.

BlackRock is “actively consulting with regulators, index providers, and other market participants to help ensure our clients can exit their positions in Russian securities, whenever and wherever regulatory and market conditions allow,” a spokesman for the fund manager said in a statement. He added that the firm is “taking all necessary actions to ensure compliance with applicable sanctions laws and regulations related to investments in Russia.”

U.S. mutual funds and exchange-traded funds owned more than $71 billion in Russian equities and bonds at the end of January, according to


Direct estimates.

Clients of some mutual funds that hold Russian stocks and bonds pulled more money than they added last month. Net outflows from

Invesco Ltd.

IVZ 4.21%

’s Developing Markets Fund, whose Russian stocks accounted for 7.9% of assets at year-end, totaled about $348 million in February, according to a preliminary estimate compiled by Morningstar Direct. Harding Loevner’s Institutional Emerging Markets Portfolio fund, with more than 8% invested in Russia at the start of February, had outflows of $221.6 million, Morningstar Direct said.

Mutual funds and ETFs that can be purchased by individual investors are subject to additional regulations and disclosure requirements that don’t apply to private investment pools, such as hedge funds, which are sold to institutions and wealthy families.

By law, mutual-fund investors have a right to receive their funds’ closing price on the day they ask to sell their shares. ETFs trade like individual stocks and can be sold at any time at their current market price.

Many managers state in their funds’ offering documents that they may move to limit or suspend redemptions under certain conditions. In practice, though, funds rarely take those steps.

In March 2020, the SEC allowed mutual funds to borrow money from their parent companies to meet a rush of redemption requests, as the market swooned in the early days of the Covid-19 pandemic.

In 2015, Third Avenue Management LLC’s Third Avenue Focused Credit Fund became the first mutual fund to halt redemptions without obtaining an SEC order authorizing the move. The fund did so as it sought to liquidate its holdings during a difficult stretch for junk bonds.

The SEC adopted new rules in 2016 requiring funds to review liquidity risks and hold a minimum amount of liquid securities.


Should regulators grant U.S. investment firms relief from fund-liquidity and client-redemption rules to help them navigate fallout from Russia’s invasion of Ukraine? Join the conversation below.

BlackRock, Van Eck Associates and

Franklin Resources Inc.

are among firms that have recently taken steps to address the steep selloff in ETFs that focus on Russian stocks, tweaking the way they create new shares or suspending those creations. Direxion Funds said it would liquidate its leveraged Russia ETF later this month.

Industry executives said they expect their challenges to worsen as index compilers including


move to cut Russia from their benchmarks.

MSCI said Wednesday that it would remove Russian stocks from its widely followed emerging-markets indexes. The firm said it had sought feedback from market participants and found “an overwhelming majority confirming that the Russian equity market is currently uninvestable and that Russian securities should be removed from the MSCI Emerging Markets Indices.”

Funds that seek to mirror the performance of popular benchmarks will struggle to match any changes to their Russian weightings if the market remains closed. As a result, the performance of those funds could begin to veer away from that of the indexes they are trying to match.

“If they still own stocks that are not part of the index, that would result in tracking error,” said

Todd Rosenbluth,

head of ETF and mutual-fund research at CFRA. “The longer this drags on, the greater the risk you’re underperforming.”

Write to Justin Baer at

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