Note from the CIO: War in Ukraine

Russia’s horrific invasion of Ukraine is an unwanted reminder that geopolitical risk is a part of investing in global markets. Year to date through March 11, the S&P 500 index declined more than 12%. So how should investors respond?       

At Quantum, we believe investors should plan for the unexpected, and not impulsively react to a market crisis. No two crises are the same, but common themes include uncertainty and rapid change. So, while we could not predict any better than anyone else how the Russia-Ukraine event would unfold, you can rest assured knowing that we had already put in place a game plan that is protecting and guiding us through the crisis.

Disciplined Country Selection Criteria

The stock market is future looking, and in a well-functioning market prices do a good job of quickly incorporating expectations about the effects of events on economies and companies. This is only possible when the market is supported by a robust rule of law, the protection of property rights, the ability to repatriate capital, economic and political stability, and a reasonable commitment to free markets. However, when a country has sanctions imposed on it, many of these criteria fall apart, because sanctions restrict an investor’s ability to trade in specific stocks. Our two stock managers, Dimensional Fund Advisors and Avantis Investors, take this into consideration.

For example, after the annexation of Crimea in 2014 and the resulting sanctions placed on Russia, Dimensional reduced exposure to Russia in all its emerging markets funds. As a result, heading into 2022 the exposure to Russian stocks in those funds was less than 1%, or three times less than the exposure in the benchmark indices. In response to the threat of new sweeping sanctions against Russia, in January Dimensional halted any further purchases of Russian stocks, and in early March, announced that Russia is no longer an eligible country for investment, which means that divestment will happen as market conditions allow. Since our portfolios are as broadly diversified as index funds (if not more so), we can continue trading across multiple other eligible countries and securities while we halt trading in a specific market.  Furthermore, neither of our managers have any exposure to Ukrainian stocks, and Quantum does not invest in bonds from any emerging market countries. 

Flexible Trading

At Quantum, we believe in a systematic approach to investing that provides more flexibility than an indexing approach, which requires selling a company at the exact time the company will be deleted from an index (e.g. S&P 500). By exiting companies in the days preceding or following the date of deletion from an index, we avoid selling at a predictably depressed price.

Forest for the Trees

It is difficult to avoid allowing the latest crisis, such as the invasion of Ukraine, Covid pandemic, or social unrest to absorb our attention, but in the background of all crises, innovation and economic progress continue. For example, recent innovations in healthcare include ways to tackle chronic diseases, as well as progress toward cures for diabetes, cystic fibrosis, and certain cancers. Our cars are increasingly software-driven, easier to maintain, and safer to drive. And we are using resources more efficiently (“doing more with less”). These advances remain largely unnoticed during a given crisis, but over a decade or generation they significantly shape our lives and grow our wealth. 

Our hearts go out to the courageous people of Ukraine; may they again have the chance to resume the progress they made toward increased freedom and democracy. As for our investment portfolios, corrections are stepping-stones in the wall that all resilient markets climb.

DISCLOSURE: Quantum Financial Advisors, LLC (“Quantum”) is an SEC registered investment adviser with its principal place of business in the State of California. Quantum may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. The article is for educational purposes only; and contains the opinions of the author, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to provide investment recommendations, and it should not be relied on as such. Any subsequent, direct communication by Quantum with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

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Investments involve risk and, unless otherwise stated, are not guaranteed. The Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is not indicative of future results. Readers of this information should consult their own financial advisor, lawyer, accountant, or other advisor before making any financial decision.