Russia’s attack on Ukraine and the West’s economic sanctions sent Russian bond prices and the ruble crashing, which has also triggered losses in emerging market funds that have significant weightings in the assets, Benjamin Slupecki, a Morningstar data analyst said today.
Standard & Poor’s lowered its Russian debt rating to junk Friday. This morning, the ruble plunged more than 20% amidst after more aggressive sanctions were implemented by a range of countries in the West.
While holdings of Russian debt are limited for the most part to emerging market bond and local-currency bond funds, the funds that do own Russian bonds tend to have relatively hefty concentrations relative to their peers, Slupecki found.
“Before the crisis, the average emerging-markets bond fund held 2.9% of its portfolio in Russia. That made Russia the fifth-largest individual country by exposure according to Morningstar Direct data for end-of-January portfolios, behind Colombia at 3% and China at 3.7%,” he said in a blog.
Russian debt had an even higher weight of 4.8% in emerging-markets local-currency bond funds. That put Russian sixth on the list behind Brazil, which accounted for 6.2% of holdings in the funds, Morningstar found.
“These funds were hit not just by the steep drop in the value of Russian bonds, but also the ruble falling to a record low,” Slupecki said.
Among the funds holding “a hefty stake” in Russia's debt are Pimco Emerging Markets Local Currency and Bond Institutional (PELBX), Payden Emerging Markets Local Bond Inv (PYELX) and Western Asset Macro Opportunities IS (LAOSX).
Not surprisingly, the impact of the invasion and subsequent sanctions was swift. “[PELBX] slid 2.73% Thursday, landing it in the bottom half of the category’s performers for that session,” Slupecki said.
Diversification saved the fund from more pronounced losses, according to Morningstar analyst Karin Anderson, who wrote in commentary that for larger positions the fund does not stray far from its JPMorgan GBI-Emerging Markets Global Diversified Index benchmark.
But the fund does try to make “more-pronounced bets with its emerging-markets rates positioning” to try and add value, Anderson wrote. Among funds with heavy Russian debt exposure, Pimco is the only one Morningstar analysts are covering.
Payden Emerging Markets Local Bond (PYELX) had the highest exposure at 9.33% to Russian debt, Slupecki said.