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Canadian Family Offices -Ukraine war a trigger to check for investments tied to autocratic regimes

By Jeff Burkstein • Financial Post – Mar 22, 2022 The tragic Russian invasion of Ukraine, and historically swift and severe economic sanctions that have isolated Russia from the world’s democracies, are not expected to materially impact most Canadian ultra-high-net-worth investors and wealthy family offices, given Russia’s small footprint in global markets.

But it may cause investors to examine their exposure to investments in other autocratic regimes.

Since the invasion and resulting sanctions, “Russian stocks have essentially become untradable, and their value, where they used to trade in places like London, has pretty much fallen to zero,” says Wayne Kozun, chief investment officer with Forthlane Partners Inc. in Toronto.

“So where you did have exposure – let’s say you had 1 per cent of your portfolio exposed to Russia, that’s essentially all gone away,” he elaborates.

Forthlane does private equity investing for UHNW clients, but almost all of that is focused on developed markets, rather than in markets where the rule of law is uncertain. “That has always been a concern in places like Russia,” Kozun explains.

“I don’t see most North American-based single or multifamily offices having big private exposure to Russia,” says Arthur Salzer, founder and chief executive officer of Northland Wealth Management Inc. in Toronto. “We don’t have direct exposure to the Russian markets for our clients.”

The impact that the Russian sanctions will have on Canadian UHNW investors is likely to be more indirect. For example, this could affect investors who hold stocks in companies in other markets, such as Europe, that conduct significant business in Russia, says Kozun.

Nevertheless, those sudden shocks to the world financial markets have highlighted the need to carefully assess investor portfolios and approaches.

“In general, it is important to be well diversified,” says Kozun, who advises that exposure to instruments such as commodity ETFs or gold ETFs is a good way to help protect against a market downdraft involving stocks and bonds. Shocks like the Russian invasion of Ukraine and the severe sanctions imposed by the international community on Russia have highlighted the need for more active stock picking in the public equities component of a diversified asset mix, as opposed to passive equity investing, such as in ETFs, says Greg Thompson, executive chairman of Focus Asset Management, a privately owned high-net-worth firm in Toronto.

“Real companies that have real earnings are, for the most part, probably a more prudent way to protect capital in the public markets…if the world changes,” elaborates Thompson, who notes that when major shocks occur in the market, many stocks in passive ETFs will already be trading at high multiples of earnings and are therefore likely to suffer as the market’s appetite for risk is altered.

A longer-term impact that could have much larger ramifications for UHNW investors and wealthy family offices is if some decide, as a result of Russia’s action and the subsequent sanctions imposed, to avoid investments in other autocratic countries.

Some UHNW or family office investors take emotion into account when making investment decisions.

“It depends on the family. Some have very certain political viewpoints and they stick to that. Others just say ‘I want to make money,’” says Salzer.

“Often we find that people who have been financially successful start to think about doing good things to give back to the world. That probably means they start thinking more about ESG considerations,” says Thompson, who notes that investing in autocratic governments will likely be viewed as a barrier to being a good corporate citizen.

If, for personal reasons, investors wish to avoid having exposure to autocratic countries in addition to Russia, they need to carefully select the countries they want to rule out. “They would have to use an active global equity manager to do that, because I can’t think of large, liquid, exchange-traded funds that give emerging market exposure and don’t have some exposure to those countries,” says Thompson.

The impact to a wealthy investor’s portfolio by eliminating China would be much more significant than any losses emanating from the Russian sanctions.

China has a much larger presence on world markets than Russia, and UHNW investors and family offices will likely have a substantially larger exposure to that country through instruments like stocks and ETFs, or even private equities, than they would to Russia, says Kozun.

“I think the biggest effect of the sanctions resulting from the Russian invasion of Ukraine is this is going to make people think a little bit about the Taiwan situation, because it’s somewhat analogous to Russia/Ukraine. It may make people worry a little bit about exposure in both China as well as Taiwan,” Kozun elaborates.

“It could cause people to be a little bit more hesitant about those exposures if they’re worried that all of a sudden it could be frozen, and they could lose close to 100 per cent of those investments,” he adds.

For example, within the emerging market sector, Taiwan Semiconductor Manufacturing Company Limited is one of the largest stocks, with semi-conductors being a critical component of many everyday consumer goods, including cars and cellphones.

“If all of a sudden there was an embargo on Taiwan or if the semiconductor processing in Taiwan was destroyed, there could be huge ramifications that affect us in very pervasive ways throughout the economy,” says Kozun.

In order for private-company investors to obtain an edge in a country like Russia or China, or an emerging market nation where the rule of law can be volatile, the rules are very different than investing in liberal democracies. Success depends on factors such as knowing local political officials or judges.

“For those reasons we’ve always shied away,” Salzer explains.

For UHNW or family office investors who decide to avoid investing in other autocratic governments, Salzer recommends bitcoin.
“It’s a global network. It’s open-sourced. Everyone can review the protocol. You know the total supply. It can’t be modified by governments. That is the best asset in the world if you want something held outside of government influence,” he says.

Northland has invested in bitcoin since 2019, mostly through ETFs, so clients have the option of holding some of their assets in bitcoin. Bitcoin held for an ETF, which is traded in public markets, is regulated by securities commissions.

The domino effect of the Russian sanctions, on a country that, in spite of its low stature on world markets, is one of the globe’s leading oil and gas producers, might even have some direct positive repercussions for UHNW investors in Canada.

Over the short term, the price spikes resulting from energy exports being shut down from Russia to the world is creating a benefit for Canada. In Alberta, particularly, where there are many single family offices and some multi-family offices that favour investing in the energy sector, they are seeing an increase in activity, says Salzer.

For those families that have stayed in the oil patch and put money into properties over the past couple of years, “I foresee valuations going up quite dramatically – probably even more than the public stocks,” Salzer predicts.


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