It is nearly six years since “Brics”, encompassing the might of the fast-growing economies of Brazil, Russia, India and China, entered the financial lexicon. Today the catchy acronym has a second home – in the portfolios of investors attracted by so-called Bric funds.
The term – coined by Jim O’Neill, head of global economic research at Goldman Sachs – spawned a popular investment trend. EPFR Global, a Cambridge, Massachusetts-based research firm, estimates that about $13.38bn is invested in the 18 Bric funds it tracks.
Fans of the Bric concept say the four emerging market powerhouse economies account for about a third of global growth and represent a virtuous cycle: China and India are big consumers of commodities and building materials, while Russia is a leading oil producer and Brazil is rich in natural resources.
“Brics are the engine room of growth in the global economy,” says Allan Conway, head of global emerging market equities at Schroders. These countries “are on a journey from early emergence to full emergence. That journey will take 10-15 years and investors are likely to see returns measured in 100s of per cent but it won’t be a straight line and investors need to look through the volatility”.
Schroders takes an active approach to risk in emerging markets, and its investment strategy focuses on country and stock selection.
Country allocation is driven by a quantitative model, while fundamental research forms the basis of the stock-selection process. Schroders manages $5.8bn in Bric assets and launched its first fund in late 2005.
Goldman Sachs Asset Management also takes an active approach with its two Bric funds.
The first, domiciled in Luxembourg, was launched in January 2006 and has $278m of assets under management. Its US counterpart debuted a little over a year ago and has $346.5m in assets under management. Both are still open to new investors and are run the same way.
“It is very much a bottom-up fund and is relatively concentrated with 20 to 40 names in the portfolio,” says Richard Flax, co-portfolio manager of the Goldman Sachs Bric fund. “We are aiming to generate most of our return from stock selection.”
He emphasises that Brics are a long-term investment. “There is a place for this sort of exposure in the asset allocation of high net worth individuals, but this can be a volatile asset class and investors need to size their exposure accordingly and have a long-term time horizon,” he says.
Christian Deseglise, global head of emerging markets business for HSBC Investments, says one compelling reason to consider the Brics is that they have become less dependent on exports, the global economic cycle and the US growth rate.
“There has been a re-balancing of the engines of growth to more domestic sectors ... They are better able to self-sustain economic growth,” he says.
In December 2004, HSBC Investments became the first big institution to launch a Bric fund. Its flagship HSBC GIF Bric Freestyle Fund has $2.8bn under management and recently re-opened to non-US investors.
European investors can also consider the $428m HSBC GIF Bric Markets Equity Fund, which follows an active quantitative investment process.
So far this year, returns for Bric funds have been impressive. The MSCI Bric index was up 47.9 per cent in the period to October 5, compared with a 36.53 per cent advance in the broader MSCI emerging market index.
Still, not everyone is a fan of the Bric story. “We love emerging markets but Bric is not a great idea,” says Andreas Hoefert, chief global economist at UBS’s Wealth Management Research unit. “It’s a cool acronym but what it contains is four emerging markets that are large but don’t all have the same prospects. Why is Bric ignoring Mexico, Turkey and Indonesia? It’s a selection based on the fact that it is a cool acronym.”
He says investors should consider exposure to global emerging markets through a broad diversified fund – and then add single country funds if they like – rather than focus solely on a Bric fund.
Steven Schoenfeld, chief investment officer of global quantitative management for Northern Trust, agrees.
“While Brics is a catchy acronym – and the success of the emerging markets is exemplified by growth in those four countries – those markets are just one segment of that story and investors shouldn’t allocate to such a narrow group of markets when there are efficient vehicles that give you exposure to the overall category of emerging markets.
“To subdivide emerging markets into a verbally compelling – but not necessarily economically logical – category does a disservice to the overall growth opportunity within emerging markets.”
He says that if the point of investing in emerging markets is to gain exposure to world-class companies, then choosing just Brics will omit some. Brics, he adds, should be viewed as a supplement to an emerging markets portfolio.
Mr Schoenfeld recommends wealthy investors consider both an actively managed global emerging market fund and an index fund.
“There is nothing inherently wrong with having a Bric exposure if the theme is compelling to an investor. However, it should not be at the core of one’s portfolio, and the first step should be to get broad international exposure,” he says.
“Investors would be better served by ensuring they had the right international exposure – through a mix of developed and emerging markets as well as large-, mid- and small-cap companies. That kind of exercise, while a little less sexy, yields more benefit than dabbling with Bric funds. This is increasingly important as investors commit more of their portfolio outside their home country.”
Are the BRICs a Real Grouping?
You've probably heard of the supposed BRICs grouping of major emerging market powers [cf. 1, 2]--Brazil, Russia, India, and China. Supposedly, this grouping is a synergistic one, with Brazil and Russia providing the raw materials that India and China need for their fast-growing industries. We are coming upon nearly six years since this grouping was first mooted by Goldman Sachs research, so it's worth taking stock. Is there really such as a thing as BRICs and, if so, where is it headed? From the Financial Times:
