Also as international funds hub, Luxembourg finds itself exposed to the economic fallout from Russia’s war against Ukraine. Hundreds of investment funds with assets in Russia’s financial markets are making extra efforts to keep clients abreast about the financial impact of international sanctions. Dozens of funds have already been suspended and from Wednesday, European stock exchanges have banned all trade in Russian securities.
Camille Thommes (photo), Director General of the Association of the Luxembourg Fund Industry, Alfi, told InvestmentOfficer.lu that the association, like during the March 2020 pandemic crisis, is acting again as intermediary between the industry and financial regulator CSSF.
Tuesday continued to see further announcements by asset managers announcing suspensions of their Russia funds until the net asset value, or NAV, can be accurately priced again, liquidity improves and settlement again becomes reliable. This list now includes among others UBS, Pictet, JP Morgan AM, Liontrust, East Capital, Prosperity Capital and KBC. Some 850 funds have an exposure of 5 percent or more to Russia, according to Morningstar.
“The fund houses’ key concern is to protect the interests of the investors,” said Thommes. “I know that, among the general public and the media, this sometimes is not necessarily well understood. When firms decide to temporarily suspend the NAV there are good reasons because it is impossible to properly evaluate the assets.”
“Secondly it is to avoid the unequal treatment of investors in the fund, between the ones that would like to redeem and the ones that would like to stay invested. That is the key concern next to the many other operational challenges that they are facing when you can’t properly evaluate the instruments. Obviously you have an issue when you cannot ensure equal treatment of your investors.”
Luxembourg exposure seen at 18-20 billion euro
As an international investment hub and legal home to more than 3500 international funds, Luxembourg finds itself exposed to about one third of the estimated 33 billion euro invested in Russian companies through European long term investment funds. Luxembourg central bank data shows that Russian equities and debt accounted for 18 billion euro in assets at the end of 2021. Of this 11.6 billion is held in equities and 6.4 billion in debt.
Industry estimates Luxembourg’s Russian exposure a touch higher and generally use the number of ‘18 to 20 billion euro’. Even that exposure represents a mere 0.3 percent of the 5900 billion in assets with a legal home in Luxembourg at the end of 2021.
That said, asset managers and investors remain concerned of possible ripple effects and economic fallout that could spread into other parts of the financial markets.
“Compared to the 5.9 trillion, that’s a very low number. This being said, what may be different is that this focus on Russian instruments has a ripple effect, obviously, across markets,” Thommes said, adding that the additional impact of Russia’s reaction to the international sanctions is still hard to assess at the present moment.
“The direct impact is very limited. The indirect impact may go further and may be compared to previous situations. On top of that comes, as you know, the whole list of sanctions. The impact of which I cannot assess for the time being.”
ALFI board meeting Tuesday
ALFI scheduled an additional board meeting for Tuesday to hear from its members - asset managers and fund houses - how they are handling the current situation. Thommes said ALFI is set to play a similar role on behalf of the industry like at the beginning of the pandemic in March 2020, when fund markets also saw unexpectedly large outflows.
“We meet to assess the situation and take up any potential questions that they may have, which we then can aggregate and pass on to the CSSF in a similar manner like we did back in March 2020,” Thommes said.
“We act as an intermediary on behalf of our membership, for the queries and the concerns they have in terms of liquidity, swing pricing or other other tools. It is a process that worked quite well because the outcome was that the CSSF then continuously released FAQ’s and updates to provide guidance to the entire market.”
Funds with a home in Luxembourg are subject to financial supervision by the CSSF. The regulator has told InvestmentOfficer that its liquidity guidance from the pandemic era also applies to the current market circumstances.
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