Dimensional Exiting Russia


In response to Russia's invasion of Ukraine, the U.S. and its allies around the world began earlier this week to impose economic sanctions targeting Vladimir Putin's government. Now, IFA's preferred funds provider, Dimensional Fund Advisors, is making plans to exit any remaining positions that its emerging markets mutual funds and exchange-traded funds might still have left in Russian stocks. 

After considering a variety of factors, Dimensional officials tell us that its investment committee has removed Russia from its list of approved markets for investment. As part of its ongoing evaluation of a market's eligibility for investment, DFA typically reviews issues related to government regulation, restrictions on foreign investments and market liquidity.

It's also worth noting that such transactions are expected to be phased in as part of the fund company's systematic investment process. The time it takes to divest  all of its holdings in Russia equity markets will likely depend on market liquidity and the functioning of settlement and clearing services.

Eliminating exposure to Russia comes on the heels of a decision in January by DFA officials to halt purchases of Russian stocks. In recent updates, they credited such a move to concern over rising risks related to sanctions on Russia from the United States and others. 

Since January, Dimensional hasn't been buying shares of Russian companies. That includes not purchasing depositary receipts with exposure to Russia.

Entering 2022, Russian equities represented between 0.3% to 1.8% of DFA's U.S.-domiciled emerging markets equity mutual funds and ETFs. That was in contrast to the MSCI Emerging Markets Index's 3.6% exposure to Russian equities.

In our own recent review of geopolitical events and resulting market disruptions, we noted that a traditional IFA Index Portfolio 100 heading into February had an allocation to Russian stocks of 0.12%. 

DFA funds used in IFA's globally diversified portfolios typically don't include any Russian-denominated bonds or emerging markets issues. That's due to long-held concerns about credit risks tied to Russian-issued debt — along with bond ratings for emerging markets on the whole.

As pointed out by Dimensional in its report "Navigating Geopolitical Events," government sanctions can lead to restrictions on investors' ability to trade in specific stocks and exchanges. DFA noted: "We previously reduced the weight of Russia in our emerging markets and global equity portfolios after sanctions were imposed in 2014 following the annexation of Crimea."

While these types of geopolitical events aren't new, neither is heightened market volatility. Whether caused by a military action or pandemic, a roller coaster effect in market pricing is a regular part of investing. 

At IFA, our investment strategy is designed to incorporate leading academic research showing that current market prices quickly incorporate all known information about current events. Instead of trying to outguess markets, our approach focuses on broad global diversification using index funds. Such a philosophy applies to not only times of military conflict but also to other crises, from social unrest and pandemics to natural disasters. 

IFA recommends that clients re-take our Risk Capacity Survey at least once a year to ensure their tolerance for risk matches their exposure to the risk in their current portfolio. 

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