The invasion of Ukraine by Russia is a tragic situation with an immeasurable human cost. The escalating conflict is also being met with significant sanctions, which will have consequences for the global economy and composition of market indices.
When it comes to what that means for investors, it’s important to understand that stock markets and high-quality bond markets have historically tended to be resilient to geopolitical events over the long-term1.
But many investors may, understandably, also be asking how our LifeStrategy funds are exposed to Russia. The funds are designed to be broadly diversified across global investment markets, including a relatively small exposure to Russian investments. As at the end of January, the funds’ exposure to Russia ranged from 0.24% in the LifeStrategy 20% Equity Fund to 0.31% in the LifeStrategy 80% Equity Fund and LifeStrategy 100% Equity Fund portfolios.
What the crisis means for LifeStrategy funds
LifeStrategy funds weathered the impact of the Covid-19 pandemic thanks to their broad market diversification and disciplined, long-term investment approach. For the same reasons, we believe these funds will continue to help investors ride out market turbulence as they adjust to the index changes caused by the Ukraine crisis.
Vanguard’s LifeStrategy funds are made up of other Vanguard funds that seek to track the performance of different stock and bond market indices, including those managed by MSCI, FTSE and Bloomberg.
FTSE has announced that Russia will be deleted from all FTSE Russell Equity Indices. That took effect on Monday, 7 March. Russia index constituents that are listed on the MOEX (Russian equity index) were deleted at a zero value.
MSCI announced reclassification of Russia from ‘Emerging Markets’ status to ‘Standalone Markets’ status. As a result, Russia is set to be dropped from its emerging market indices. The reclassification decision will be implemented in one step across all MSCI indices at a price that is effectively zero as of the close of markets on 9 March.
LifeStrategy funds hold a relatively small amount of Russian securities through some of their FTSE and MSCI index holdings. These securities will be exiting the indices at zero value on the close of 9 March for MSCI and close of 4 March for FTSE. This will likely have a negative short-term impact on the performance of LifeStrategy funds, however we expect the impact to be offset by the funds’ broad exposure to global markets, which cushions the impact of exposure to just one country or sector.
On the fixed income side, Russian bonds have been downgraded to ‘junk’ status by rating agencies Moody’s, Fitch and Standard & Poor’s. This means that at the end of the March, Russian sovereign bonds denominated in US dollars and in Russian roubles will be removed from the Bloomberg Global Aggregate Index.
As such, they will also be removed from all relevant Vanguard index and exchange traded funds (ETFs) as at 31 March 2022, and ultimately from LifeStrategy funds too.
Given the unprecedented nature of the situation, we’re mindful that a lack of liquidity could mean Russian sovereign bonds exit the benchmark sooner. Vanguard is working closely with the index provider and other index solutions providers to assess at what price the bonds would leave the index.
In any case, LifeStrategy funds continue to be open and trading daily. We do not envisage the current market environment changing that.
Committed stewards of your assets
Vanguard is committed to effectively stewarding the assets of our investors. The experienced investment teams that drive our LifeStrategy range of funds will continue to seek to match the risk and return characteristics of the underlying benchmarks for the LifeStrategy building blocks. The portfolio management teams are monitoring conditions closely and will make appropriate adjustments as and when it is necessary to do so.
Our risk-management teams, along with our sanctions and fixed income teams, are in regular discussions – both internally and externally – to assess the ongoing situation. But many parts remain unclear at the time of writing.
All funds are open as usual and investors can buy or redeem in the normal way. All client assets are safely held with third-party custodians.
We understand that sometimes investors are tempted to pull out of markets until the situation passes. However, in our experience, under these conditions the best strategy is to stay invested and stay diversified. It’s important to maintain a long-term perspective and be guided by our four investment principles.
1 Vanguard studied more than two dozen geopolitical events of the past 60 years. Returns based on the Dow Jones Industrial Average to 1963 and the Standard & Poor’s 500 Index thereafter. All returns are price returns and expressed in US dollar terms and do not include investment costs. Sources: Vanguard calculations, as at 31 December 2021, using data from Refinitiv.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.
Investments in smaller companies may be more volatile than investments in well-established blue-chip companies.
The Vanguard LifeStrategy® Funds may invest in Exchange Traded Fund (ETF) shares.
ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.
Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.
The Funds may use derivatives in order to reduce risk or cost and/or generate extra income or growth. The use of derivatives could increase or reduce exposure to underlying assets and result in greater fluctuations of the Fund's net asset value. A derivative is a financial contract whose value is based on the value of a financial asset (such as a share, bond, or currency) or a market index.
Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments.
For further information on risks please see the “Risk Factors” section of the prospectus on our website at https://global.vanguard.com.
If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this article, please contact your financial adviser.
This article is designed for use by, and is directed only at, persons resident in the UK.
For further information on the fund's investment policies and risks, please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions. The KIID for this fund is available, alongside the prospectus via Vanguard’s website https://www.vanguardinvestor.co.uk
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