The $ 51 million Central and Eastern European Fund (CEE) trading volume managed by the DWS Group has skyrocketed in recent weeks following the cessation of large-cap trading in Russia. Nearly 1.4 million shares were traded during the week ending March 18 amid news of Russia-Ukraine peace talks, the highest weekly trading volume since 2006, according to data compiled by Bloomberg. Accumulation in the OEM does not come without risk and it is not all geopolitical. Closed-end funds – unlike ETFs – issue a fixed number of shares, so their trading price can quickly deviate from their underlying assets as demand for shares shifts. The CEE traded at a premium of almost 24% on Thursday, the highest recorded for a fund that typically trades below the value of its underlying assets, making it difficult to use the fund as a tool to closely monitor Russian stocks. And most of the mutual fund bonds associated with Russia are stock receipts, which are still stuck in the stock market and therefore difficult to value. “There was nowhere to trade, nobody could bet in Russia, nobody could offset his exposure, so a lot of people came here,” said James Seyffart, an ETF analyst at Bloomberg Intelligence. But, he warned, “whoever trades these things is playing with fire right now.” Because closed-end funds do not have to report their dispositions on a daily basis, investors do not know what they own in real time and may not understand how they value their assets. About 60% of CEE holdings were in Russia-related securities as of Feb. 24, according to reports. By March 14, they had recorded almost the entire distribution at zero. While Alrosa PJSC, the only local Russian equity holding company, resumed trading this week in Moscow, other Russian-linked securities were proof of custody. The securities are given a “fair value” if their purchase prices are not readily available, which is what CEE “could reasonably expect to receive for the securities at its current sale,” DWS said in a statement. . However, any valuations assigned to Russian CEE securities “are subject to change and may be reduced to zero,” the company said. Such securities could not really be worth anything if Russia is completely excluded from foreign investors, Seyffart said. CEE has no plans to make new investments in Russian securities, the company said. CEE, meanwhile, is trading at a premium as demand for the fund has probably exceeded the amount of shares available, Seyffart added. Investors may want to play in the Russian market or hedge their trades in other frozen Russian-linked securities, he said. But these moves are dangerous, as “there is no guarantee that it will correlate with the price of the underlying assets.” Russia-centric ETFs could also lure investors away from Central and Eastern Europe if and when they resume trading, said Todd Rosenbluth, head of research at ETF Trends. This could lead to lower liquidity for the fund and make it harder for investors to get out of their positions, he added. Before stopping the Russia-centric ETFs, they suspended the creation of shares, making them behave similarly to a closed-end mutual fund. However, such ETFs have made clearer bets in the country and offer more transparency than the CEE, Rosenbluth said. “Investors’ comfort with ETFs has outweighed their comfort in using closed-end funds, so I think ETFs are more likely to win.” – With the help of Emily Graffeo.
