As war rattles economy, managers stay the course

Tweaks, not total changes, are what money managers said they're advising their clients to do amid the escalating Russian war on Ukraine and its effects on the global economy.

While Rhys Williams, Bryn Mawr, Pa.-based chief strategist at Spouting Rock Asset Management, a multiboutique manager providing alternative, traditional, and thematic investment solutions, said he's advising clients not to make any drastic moves, "we are also not aggressively buying the dip as a prolonged war or conflict is possible."

Mr. Williams currently likes big tech stocks because they have "consumer-staple-like qualities in the 21st century" and most have few supply chain uncertainties. He said he also likes real estate investment trusts "for their dividend yield and growth, and they underperformed in the first two months of 2022. In addition, we like energy (stocks) as a hedge against a wider war, but also because of underinvestment (in the sector) in recent years."

Mr. Williams thinks the while the Federal Reserve Board will indeed raise rates at its next meeting this month, the Ukraine war is going to affect both costs and consumer demand. "So, we think the Fed will be less aggressive in both the number and size of rate increases than the consensus was a (couple weeks) ago as long as the Ukraine war could lead to wider conflict," he added.

"We also can't see all the potential negative ripple effects of the Russian sanctions, even if they don't pull their own trump card by cutting off energy exports to Europe," Mr. Williams said. "However, Russia is much more important to the global financial system than the Soviet Union (was), so some prudence makes sense. Still, inflation is hot enough that rates will likely be raised 25 basis points at the next meeting."

Spouting Asset has about $3 billion in assets under management.

Daniel Phillips, Chicago-based director of asset allocation strategy for Northern Trust Asset Management, is advising clients to "remain calm and ensure their risk exposures are in line with their risk tolerance," he said in an email, while noting that "tectonic shifts in the post-war world order have taken place and will take time to sort out."

Mr. Phillips noted that his firm's investment committee also recommended two shifts to better position portfolios for two key possibilities resulting from the war: declines in developed ex-U.S. markets equity values and increases in inflation.

"In recognition of the economic challenges Europe will face, we reduced our developed ex-U.S. equities position by 4%, bringing it tactically underweight vs. strategic positioning, and split those proceeds across U.S. equities and U.S. high yield," he said. "In recognition of the new round of inflationary pressures, we shifted 2% out of investment-grade fixed income into inflation-linked bonds. That leaves us still slightly underweight inflation-linked bonds and materially underweight investment-grade fixed income."

"Overall," Mr. Phillips added, "we are now tactically positioned with overweights to U.S. risk assets, both equities and high yield, and natural resources, where we were already overweight."

Northern Trust had $1.3 trillion in AUM as of Dec. 31.

R. Burns McKinney, Dallas-based portfolio manager at NFJ Investment Group, said the best equities to hold amid geopolitical tensions tend to be those that pay dividends.

"The Russian invasion is likely to exacerbate already elevated inflation due to supply shocks to oil and other commodities," Mr. McKinney said. "Companies paying and raising dividend payouts provide a way to keep up in inflationary environments. Second, because this is a risk-off situation, yielding stocks tend to offer both defense and lower volatility."

NFJ, with $9 billion in managed assets, is an affiliate of Virtus Investment Partners, which has about $180 billion in AUM.

Striking a particularly pessimistic tone about the crisis was Randolph Wrighton, senior managing director, equity portfolio manager and analyst at Barrow Hanley Global Investors in Dallas.

Mr. Wrighton noted that his firm's portfolios were already underweight in Russia even before the invasion of Ukraine. But now, with little immediate hope of a resolution, it becomes very difficult to forecast how this crisis will end and what it will mean for investments in Eastern Europe and Russia, he said.

Barrow Hanley, which focuses on value investment in global equities and fixed income, has more than $50 billion in assets under management.

Mark Yusko, CEO and chief investment officer at Morgan Creek Capital Management, Chapel Hill, N.C., which has $2.7 billion in AUM, said his firm has been cautious about equity markets "for a while" and has been advising clients to be more "hedged than normal."

"That said, we didn't anticipate the bold move by Russia so we weren't advising clients to be moving money to the sidelines," Mr. Yusko noted. "We have been overweight oil and oil services for over a year, so our clients are benefiting nicely from the rapid rise in commodity prices. We have (also) been advising clients to diversify broadly and add exposure to digital assets like bitcoin, and that has helped dampen much of the recent volatility — and that impact has been enhanced this week. We had also been advising clients to look for value in the beaten-down China tech sector and those companies have held up better than U.S. tech this year."

Matt Dines, Seattle-based CIO and co-founder of fixed income and options strategy firm Build Asset Management, said while Russia is a minuscule trading partner to the U.S., he sees "asymmetric risk potential to the downside" the longer, deeper and broader the situation in Ukraine goes, "due to the outsized role that Russia and Ukraine play as exporters of energy and agricultural commodities for the global economy."

"We … advise our clients that the best way to avoid unacceptable downside is to have an investment framework that seeks to avoid hazard in the first place" through a "defensive approach" to portfolio construction, Mr. Dines said. "In fixed income, we currently favor sectors and issuers with high credit quality and (which) offer inflation-resilient and recession-proof income and operating profiles." Build Asset has $115 million in AUM.

The movement toward more ESG investing will render Russian assets "uninvestible for the foreseeable future or until (there is) a regime change" in Moscow, said Mark Holman, partner and portfolio manager at TwentyFour Asset Management, a London-based fixed-income boutique of Vontobel Asset Management. Indeed, FTSE Russell on March 7 removed Russia from all of its equities indexes, while MSCI said that as of the close of trading March 9, it would remove Russian securities out of its emerging markets indexes and other indexes that draw upon the EM classification. In addition, S&P Dow Jones said it would remove all stocks listed and/or domiciled in Russia from its standard equity indexes, effective March 9.

In addition, FTSE Russell said it deleted Russia stocks from all its equity indexes, effective March 7, and also said that all ruble and non-ruble-denominated Russian government bonds, and hard currency bonds issued by Russian domiciled issuers will be excluded from all FTSE fixed-income indexes, effective as of the end of March.

As of Dec. 31, TwentyFour Asset had $31.2 billion in AUM and Zurich-based Vontobel Asset had AUM of $194 billion.

While geopolitical risks are always a wild card in investing and are nearly impossible to forecast, Nuveen's global investment committee said in a February report it does not think this is a time to adjust asset allocations.

"Institutional investors should focus on long-term policy objectives, individual investors should remain committed to their portfolio growth and income objectives," Nuveen wrote. "All should stick with the broad diversification, asset allocation and portfolio rebalancing plans already in place."

Nuveen noted that it expects market volatility to increase as "uncertainty around broader military action grows and the market sell-off is likely to persist." In addition, while military action isn't expected to spread beyond the borders of Ukraine, the war's "economic ramifications could be relatively far-reaching," citing that half of Europe's energy supplies originate in Russia, and Germany has already canceled the planned Nord Stream 2 pipeline due to the hostilities.

Over the near term, Nuveen expects alternative investments, especially private ones, to remain "relatively insulated" from the turmoil in Ukraine, which is one reason they remain a critical part of a portfolio. Chicago-based Nuveen had $1.2 trillion in AUM as of Sept. 30.