When former Goldman Sachs economist Jim O’Neill first coined the term ‘BRIC’ in 2001, it prompted a rush of capital into the emerging economies of Brazil, Russia, India, and China.
Since then, the combined annual economic output of these four countries has soared from $2.7 trillion in 2001 to $16.6 trillion in 2014, according to TradingEconomics.
So why, fourteen years later, has Goldman Sachs Asset Management (GSAM) decided to kill its BRIC fund?
“BRIC as a concept is still very valid, because emerging markets are not going to do well unless this big block does well.”In a filing to the US Securities and Exchange Commission this week, GSAM said the BRIC fund was being folded into a broader emerging markets fund because of expectations that it would not “experience significant asset growth in the foreseeable future.” The fund had lost 88% of its assets since peaking in 2010, according to Bloomberg.
All of this begs the question: if the originator of the BRIC strategy is getting out of the game, is there any opportunity left in those four emerging markets?
Actually, there are “ample opportunities,” said Kunal Ghosh, who manages emerging market equities and BRIC strategies at Allianz Global Investors.
“BRIC as a concept is still very valid, because emerging markets are not going to do well unless this big block does well,” Ghosh said.
Combined, Brazil, Russia, India, and China represent about 60% of emerging economies as a whole. China is by far the largest, making up 14% of the entire global economy. The US, in comparison, makes up about 23%.
“China is very important in terms of the evolution of the world economy as a whole, and particularly impacts emerging markets,” said George Hoguet, managing director and global investment strategist at State Street Global Advisors (SSgA).
Performance Problems
In recent years, the BRIC countries—and therefore emerging markets as a whole—have not done particularly well. After years of rapid growth, China is in the midst of an economic slowdown, while Brazil and Russia are both experiencing recessions. Even India, which Hoguet calls “the bright spot,” is facing some challenges, with Prime Minister Narenda Modi’s plans to liberalize the economy being met with protests.
This underperformance is reflected in investment products tied to BRIC countries, such as GSAM’s BRIC fund. Other products, such as Franklin Templeton Investments’ BRIC fund, have also fared poorly. The Templeton BRIC fund—run by veteran emerging markets investor Mark Mobius—lost 23% this year alone, with five-year losses of 10%.
Allianz’s BRIC Stars fund has also struggled. Once a flagship for the German asset manager, when Ghosh took charge of the portfolio one of his first moves was to expand its remit to invest more money beyond the core quartet of countries in an attempt to address a period of poor performance.
Broader emerging market offerings, such as Aberdeen Asset Management’s Emerging Markets fund, are also suffering, with the Aberdeen fund down nearly 19% this year. Aberdeen’s stock has also been hit, down 24% this year, as investors have grown wary of the group’s perceived overreliance on its emerging markets products.
But this doesn’t mean these markets will continue to underperform, according to SSgA’s Hoguet.
“Equity markets experience what’s known as mean reversion,” he said. “We’ve been in a period where emerging markets have significantly underperformed over the past five years, but they had outperformed prior to the global financial crisis.”
“There are so many competitive companies located in emerging markets that investors should access at appropriate price levels.”In the long term, Hoguet said, holding emerging markets will give higher returns than developed market equities—he estimated roughly 50 to 100 basis points of outperformance. And Allianz’s Ghosh also had positive expectations for emerging markets in the near future.
“We are toward the end of this whole rebalancing of the emerging market economy,” Ghosh said. “We envision that by the end of 2016 there are probably going to be more significant returns than you’ve seen in the last two, three years.”
Despite this positive outlook, neither Hoguet nor Ghosh advised dumping all of one’s emerging markets allocation onto BRICs. In fact, if GSAM’s BRIC fund failed, Ghosh said it is likely because it was too heavily concentrated in its namesake—hence his own actions at Allianz.
“The claim of not seeing any asset growth is probably a result of poor design of the product, with too much focus on just four countries,” Ghosh said.
Beyond BRIC
For Allianz’s BRIC Stars fund, Ghosh said, the asset allocation is now more representative of the market share the BRIC countries have in the broader context of emerging markets. While 66% of the assets are in BRIC, following his changes the remaining capital can be invested “anywhere else”—and that “makes all the difference,” he said.
Ghosh recommended paying close attention to consumers, and picking stocks based on their consumption patterns—because consumption, he said, is what will to lead these economies forward in the coming years, as retail sales continue to climb.
Emerging markets can be “very volatile,” Hoguet said, but there are still several advantages to the asset class. In addition to the diversification benefits, the higher rates of growth in these markets can lead to stronger earnings, and in turn, higher dividends per share. Including emerging markets also opens a portfolio to broader investment opportunities, he said.
“You shouldn’t limit yourself to, say, Facebook,” Hoguet said. “Why not buy Alibaba? There are so many competitive companies located in emerging markets, like Samsung, that investors should access at appropriate price levels.”
While there are other factors that will continue to cause outflows from the sector—the normalization of the US interest rate, for example, or the continued fall in commodity prices—Hoguet said that does not mean investors shouldn’t have a strategic allocation to emerging markets.
“It’s frequently companies that emerge, not countries,” he said. “And there’s still many world-class companies in emerging markets… I don’t believe investors should abandon the asset class altogether.”
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