James Milne, Head of Product at AlphaCert and Stephen Huppert, Independent Consultant and Advisor caught up to discuss the current Russia-Ukraine conflict, and what it means for the superannuation industry.
In this episode, James and Stephen discuss the consequences of this invasion for superannuation funds and other institutional investors, and how they can understand their exposure to these events.
Alpha Chats: The Russia-Ukraine conflict
Today we are going to look at the consequences of this invasion for superannuation funds and other institutional investors, but we definitely acknowledge that these consequences are immaterial compared to the significant suffering of the Ukrainian people. But we have seen lots of headlines here in Australia, and I know also in New Zealand, regarding the position of superannuation funds and other institutional investments, and certainly a government here in Australia has waded in.
So, James, what are some of the challenges for a trustee and even trying to get a very quick, easy view of their exposures?
What are some of the challenges for a trustee?
Yeah, absolutely. There’s plenty of challenges from a data perspective there, Steven, and I think, when the invasion happened on the 24th of February, the simplest thing that everybody’s going to do is ask, “What’s our exposure to Russia in terms of the country? What’s our exposure to the Russian ruble in terms of the currency?” But also to Ukraine and the Ukrainian currency, “What are we exposed to in the region there?”
But then you want to take it one step deeper and you want to start looking down into, “What is… Is Russia a country of risk?” So you might not necessarily have companies that are domiciled within Russia or have the heat cut headquarters within Russia, but you might have Russia where a predominant amount of their trading is occurring. So you might have Russia as the country of risk.
So those are the type of data attributes that you’re looking for. Then you can go a step further and you can start to look at, okay, “What are my external managers and what do they hold within the region and within Russia?” And then when you’re starting to look down into your investment vehicles and your trusts or ETFs that you’re invested in from a look through perspective, “What within those investment vehicles holds ration assets?” So what’s your level of exposure there? And I think what we’ve seen from certainly the New Zealand/ Australian perspective is that the holdings in this part of the world are probably fairly minor as a percentage of the total portfolios. But certainly if you’re looking at some of the European funds and the like.
How do you respond to this exposure?
As a trustee of a Superfund, once I’ve worked out, okay, here’s my exposure to Russia. I guess there’s a couple of ways I can respond. And many of the many pension globally, their first reaction was to write down or write off the value of Russian assets. And I know in the US and in the UK, a number of pension funds and hedge funds also did this, but it very quickly moved from a writing down or writing off value to the investment conversation. What have we seen in New Zealand regarding the investment?
Yeah, New Zealand we’ve seen positions come out from the large government entities. So that’s the New Zealand Super Fund ACC investments, and two other funds that are government, so sovereign funds. And they had a joint statement around, they were divesting assets and they were divesting all Russian government bonds and any Russian securities as well that were held. That was a fairly swift response in early March, I think. So four or five days after the invasion there.
And certainly one of the things that was interesting here in Australia is that the federal government came out with quite a strong statement saying that they expect super funds to be considering disinvestment and as part of sending a very strong signal to the Russian government. And I don’t know what the situation in New Zealand is, but it’s always quite fraught from a political point of view… “Should the Superfunds be used for political purposes?” And typically the coalition government that we’ve got here in Australia in the past has said, “No Superfund shouldn’t be used in their investing for political of purposes”. But here’s a very explicit case where the treasurer came out with a very strong statement that Superfunds are expected to send a political statement by disinvesting.
Yeah. And I think it’s really… a lot of funds will be thinking after this, “Do we have the appropriate risk framework in place? Is there something we could have been looking at in the weeks or leading up to the invasion on the 24th? Is there something that we could have been doing to get our ducks in a row and look at our exposure at that point and potentially even before anything happened, assess the risk and start those assets.
Yeah, no, that’s a really important point, isn’t it? And unfortunately, a few of the funds that I’ve been speaking to… didn’t really act until the invasion, but you’re right. You know, I think any good risk management framework should have been implemented and looking at your exposures, trying to work out what the options were. And, so when the invasion actually occurred, you would think a good best practice would’ve been already knowing a trustee board or any other institutional investor would’ve already had a view of how they would react when the invasion occurred because it certainly wasn’t a surprise that was building for weeks ahead.
So, and I guess it’s a bit like COVID 19, that plans were probably there in place in theory, but how quickly did funds respond? And I think it is important for all funds to sit down after an event like COVID 19, like the invasion and look at how robust their risk management frameworks were, how well did they respond? Did they have all the data they needed at hand? Did they have to scramble around to find data and it’s worthwhile then revisiting their whole investment data framework to make sure they have got adequate resources in place.
Yeah, absolutely. Good point there, Steven. And I think we’ll leave with that – thanks everyone for listening, and we’ll see you on the next Alpha Chat.