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Ukraine/Russia Geopolitical Event -
Investment Team Commentary

Source: Investment Team
Publish Date: Feb 25, 2022
Run Time: 10 minutes

The portfolio management teams of our major asset classes weigh in with their take on the very fluid situation in Ukraine, and the implications for our portfolios.



David Picton, President & CEO | Jeff Bradacs, CFA, Portfolio Manager

Over the past 36 hours we have seen the Russia-Ukraine crisis take a turn for the worse with Russia launching a series of attacks at various targets across Ukraine. This pushed most major broad equity markets lower at yesterday's open by 3-4%, oil higher by 8% and gold (a broader gauge for fear) higher by 3%1. By the end of the session, however, these moves reversed with equity markets positive, oil fading and gold closing the day lower. 
While difficult to pin-point a single reason for this rally, heading into the day equity markets already reflected bearish positioning and significant uncertainty (near correction territory), with oil up nearly 30% reflecting an anticipation of supply disruptions. Furthermore, instability from this crisis has stalled fears of an aggressive U.S. Federal Reserve (“Fed”) tightening as expectations of a 50bps rate hike in March fell two-thirds to less than 10% as suggested by the CME Group's widely followed FedWatch tool2
In the short run, the escalation of the situation is difficult to predict. However, history shows us that despite near-term volatility, these types of events are generally not a detriment to longer-term equity market performance. We believe that yesterday’s trading session was likely an important near-term low. In our view, the geopolitical conflict will likely result in the global economy slowing down a little quicker than we had originally thought, which will likely keep the Fed in check and allow the market to rally in the second half of the year with a focus on quality growth leading the way. Within our equity portfolios, we continue to add to names exhibiting positive change and quality growth attributes given our broader outlook, which we recently wrote about and published in our Q1/22 Investment Review & Outlook.


Philip Mesman, CFA, Head of Fixed Income | Sam Acton, CFA, Portfolio Manager | Ashley Kay, Strategist  

The market has struggled all year with global central bank hawkishness, which has resulted in tough performance for a typical global balanced 60/40 portfolio this year. 
The Russian-Ukraine crisis, although extremely tragic, was well telegraphed and the market was prepared, as you can see through the hedges being taken off the day prior to the attack and into yesterday. 
The less hawkish comments from several central bankers in Europe and the U.S. yesterday also aided the recovery in the market3. Whether you agreed with the pricing of a 50bps hike this coming March by the Fed or not, not one Fed speaker, except for Fed James Bullard, is on board, and we saw evidence of this yesterday. With this attack, sponsorship for a 50bps hike is almost definitely off the table, regardless of what the Personal Consumption Expenditures Price Index print this morning shows. Several ECB hawks also talked down future hikes in the European curve yesterday4.
We believe there’s a bit of reprieve for the time being with the market maybe a little short and caught a bit too defensive on the bounce, so perhaps the near-term bottom is in. We saw a classic risk-off reaction in fixed income markets with government bond yields lower and credit spreads wider – however we observed notable resilience in credit yesterday, suggesting a desire for credit investors to buy the dip at these higher yields. Credit spreads have now widened meaningfully since the start of the year and are now back within historical ranges.
With respect to the Russia/Ukraine situation, it is obviously very fluid. Sanctions do not seem very strong, for now. Energy is key. Europe has not addressed their energy dependence on Russia, and this weakness has come back to haunt them at a time when the European market is in serious demand of the energy complex.
On the bond side, we have been very active and defensive. Yesterday we became less defensive. In fact, we started to sell derivative hedges the day prior and we have covered several single-name shorts and liquidated some longs that have held in well the past few weeks. 
We also sold most equity derivative hedges overnight and into yesterday’s morning session and purchased calls on equity and HYG indices. We still maintain deep out-of-the-money put hedges on several credit hedges. We refer to them as “rubber stoppers” as a safety mechanism in case things worsen. 
On the rates side, we moved our put option structures closer to the money during yesterday’s morning trading session as 10YRs touched 1.85%. They closed at 1.95%. We still think the Fed is behind the curve, but we’re fine to fight that battle mid-year. 
There were some massive moves in the inflation complex yesterday as 5yr and 10yr TIPS dropped 30bps at one point as oil rallied. We are not involved in this space. 


Craig Chilton, CFA, Portfolio Manager | Tom Savage, CFA, Portfolio Manager
Arbitrage spreads tend to widen from one of a few factors during stress events:
  1. General risk aversion expands the required risk premium to hold risky assets.
  2. Lower equity markets mean lower deal-break price assumptions for the non-zero probability of deal failure.
  3. Deals requiring access to capital markets for financing (i.e., private equity deals) have higher perceived risk.
Within our portfolio, special purpose acquisition companies (SPACs) currently make up about 70% of the portfolio and are relatively immune to these types of events (they do not behave like risky assets, and they do not have downside price exposure at terminal value). With respect to the merger arbitrage component of the portfolio (currently about 30%), the lack of direct economic impact from Ukraine/Russia on our deal companies, along with the fact that acts of war are generally carved out of merger contracts as a basis for termination, means we aren’t really seeing much impact from the first two factors above. We are sensitive to the third factor by keeping our aggregate exposure to private equity deals within our risk tolerance.


Michael White, CFA, Portfolio Manager | Neil Simons, Portfolio Manager
While the situation in Ukraine is an unwelcome and unpleasant reality, 2022 has been off to a rocky start for investors for reasons beyond this geopolitical risk. In the backdrop, the pace of global economic growth has been slowing from the stimulus-driven recovery from COVID-induced deflationary shock in early 2020. Inflation impulses have been a feature in asset markets since Q2 2020, reflecting monetary and fiscal aid coupled with supply chain disruptions. This is an important consideration. Investors would be too quick to point to the Russia/Ukraine situation for rising commodity prices, reflecting the risk of destabilizing supply for everything from energy and commodities to grains and rare earth metals, but we believe this situation is merely adding fuel to fire.
From our multi-asset strategy perspective, 2022 has suited our portfolio construction framework quite well. Diversification should be both a design element and a benefit in a resilient portfolio. Despite the uncomfortable realities of inflation and the central bank policy response, now coupled with geopolitical risk, the best course of action amid uncertainty is to seek diversification.

Depending on the strategy (and the relative robustness of the toolkit it offers), within our multi-asset strategies suite, in addition to utilizing uncorrelated strategies, we have sought to demonstrate diversification primarily through holdings in a broader palette of asset classes. As some of the asset class building blocks in our portfolio construction framework, we employ four commodity asset classes to play discrete roles in a diversified portfolio: Energy, Industrial Metals, Precious Metals and Grains. Some of these commodities are sensitive to economic growth and therefore act as a means of redistributing equity risk in a portfolio. Some of them act as diversifiers. Some of them act as inflation or crisis hedges. Some of them can play dual roles. Inasmuch as the current environment offers an opportunity for these asset classes to “play their role”, we remind investors these allocations are “hard-wired” in our portfolio construction framework to achieve diversification, rather than exploit the current environment. Put another way, the value-add from these allocations is driven by a robust process, rather than a particular tactical bias. Moreover, because our process is more systematic in nature, these allocations are rebalanced to target weights on a daily basis, in effect monetizing the upward trajectory in this corner of the portfolio.
We do believe there will be a somewhat asymmetric opportunity to take on equity risk but believe there is a more capital-efficient (and risk-controlled) manner to seek it. We are dis-interested in making wholesale reallocations to a strategic asset mix, but our process allows for tactical opportunities to be exploited efficiently through options strategies (as an example), which profit from equity upside and commensurate downside to implied volatility. Contemplating these trades should be thought of as a “hedge” to the positioning which has benefitted the portfolio of late, rather than a market call, per se. We believe that amid this tension, it would be foolhardy to make bold predictions given numerous potential outcomes and timelines at play.
1 Source: PMAM Research, Bloomberg L.P.
2 Source:
3 Source: and events/speeches/sp 20220224/sp 20220224 pdf.pdf?la=en
4 Source: Bloomberg L.P.

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