Insights
Insights 29.3.22 Author: Chris Clayton

The Ukraine crisis – An investment and ethical perspective

Insights 29.03.2022 Author: Chris Clayton

‘Time is one of the biggest mitigators of risk’.

Two years ago, I wrote about the Covid-19 crisis and the effects on investment markets. Whilst we are currently seeing record numbers of Covid cases, it is of course no longer the main topic filling our  television screens and column inches.

In March 2020, I lifted an old quote: ‘There are decades where nothing happens and there are weeks where decades happen’. How ironic that these were the words of Vladimir Lenin, the founding head of government of Soviet Russia.

Lenin’s communist party proclaimed the Soviet Union in 1922, following several years of civil war and 100 years later the, now, Russian Federation, ‘led’ (an interesting word here) by Vladimir Putin has launched an unforgiving and bloody invasion of Ukraine, a county once part of the Union but who has enjoyed its independence since 1991.

Putin’s reasons may appear confusing and unclear but the reality is that Ukraine has vast natural resources and this, together with the West’s reliance on Russian oil and sanctions (which can have two-way effects) means that we are once again sitting here wondering what effect this will all have on the world economy.

In some ways it is a bit crass to be worrying about the financials when so many innocent people are being killed, wounded and displaced from their homes and no one who has been following events can fail to be moved and upset by the suffering. All our hearts and minds do of course go out to everyone affected. Let us hope that there is a resolution to this terrible situation very soon.

The reality is however that the world does have to continue to turn and looking at our own clients’ investments the actual effect on well-diversified portfolios has been surprisingly modest. Yes, there have been periods of volatility and yes, it is likely to continue until the crisis comes to an end, but as always, holding nerve is looking to once again be the best policy as bounce-backs are becoming as frequent as drops.

Inevitably, we have also seen ‘10% drop’ letters going out to some people. These are letters that certain investment managers have to send out to clients when a 10% or more value drop is experienced in any reporting quarter. Here again though we are seeing a lot of yo-yoing going on.

As I said during the Covid crisis, time is one of the biggest mitigators of risk and this has proved to be true time and time again.

Many of our clients will be receiving updates from various sources as well as being fed all sorts of views from every direction. The reality is though that nobody is actually sure how this is going to play out. What we do know however is that in times of uncertainty returning to the fundamentals of investment principles is usually the best option. Be diversified, trust the professionals and most of all, do not panic.

Whilst the FTSE All-Share index is not an exact barometer to measure a balanced portfolio by, it is interesting to note that between 1962 and the beginning of the Covid pandemic, there were 10 bear markets, with an average duration of just over a year and an average decline of 37%. On all 10 occasions the index eventually recaptured any bull market gain it had previously achieved, with the average recovery period being around 22 months. The same was true over the Covid period.

Ethics

Apart from the normal concerns we are, quite understandably, receiving calls from clients regarding the ethical position of their investments.

The subject of Environmental, Social and Governance (ESG) is high on our regulator’s (FCA) mind and a lot of rules and guidance were introduced well before the current situation arose. As a result, fund managers have a duty to consider this when making investments. In reality, the panel of managers that we put together have had this high on their agenda for a long time, as companies who follow good governance in this area tend to perform well in the modern era.

Clearly, we live in a global economy and sometimes it is difficult to unpick every connection, but given the above and the world’s condemnation of such appalling acts that we are witnessing, investing directly into Russia for the foreseeable future would appear as undesirable as it is effectively impossible.

The FCA is however looking into how retail funds can make exceptional use of ‘side pockets’ given the significant practical challenges in disposing of Russian and Belarussian assets in the context of suspensions and extensive global sanctions.

Side pockets would potentially give authorised fund managers the option to separate Russian and Belarussian assets, that are difficult to sell and/or hard to value, from the fund’s other core investments.

Side pockets could also allow:

  • New investors to enter the fund without getting exposure to Russian assets
  • Existing investors to redeem the rest of their investment, while illiquid Russian assets remain in the separate side pocket (and in many cases marked to zero), while retaining rights to any eventual value

The reality is that the core of the fund mangers on our panel, had very little Russian exposure in the run up to the crisis but we will be watching the above with interest. What is for sure is the whole topic of ESG and indeed Socially Responsible Investing (SRI) is only going to grow from here.

What next?

As always, the Financial Planning Team are on hand to discuss any thoughts or concerns that you may have, so please do not hesitate to call us.