The BRIC backlash has begun.
The acronym BRIC — coined by Jim O’Neill, chairman of Goldman Sachs Asset Management — stands for Brazil, Russia, India and China. It’s shorthand for both emerging markets and a strategy by which some fund managers invest in them. Goldman sells an actively managed BRIC mutual fund, as does Franklin Templeton. Guggenheim Investments and iShares, likewise, offer exchange-traded funds built around BRIC indexes.
But lately, stock markets in the BRIC countries — the four biggest emerging markets — have gone soft. The MSCI BRIC index lost 2.45 percent, annualized, over the three years through September, while MSCI’s broader emerging-markets index gained 3.13 percent. The Class A shares of Goldman’s BRIC fund lost 0.73 percent, annualized, over the same period, and those of the Templeton fund lost 0.67 percent, Morningstar said.
Some fund investors have responded by jumping the wall. Last year, a net $5.4 billion of investor money flowed out of the BRIC offerings tracked by EPFR Global in Cambridge, Mass. An additional $1.3 billion leaked out through the end of August.
Some investment professionals say the lackluster returns point to a peril of using only four countries, even ones as big and bountiful as Brazil, Russia, India and China, as proxies for a larger investing world. Different companies and index creators define emerging markets differently, but broader indexes might include 20 countries.
“The BRICs represent 44 percent of the MSCI emerging-market index,” said John R. Chisholm, chief investment officer at Acadian Asset Management in Boston. “That’s a big percentage. But if you were investing in the U.S., you wouldn’t limit yourself to only the four biggest sectors. That wouldn’t make sense. Similarly, it doesn’t make sense to limit your universe among the emerging countries. There’s never really an investment rationale for limiting yourself like that.”
By focusing only on the BRICs, an investor would have missed the bull markets this year in Egypt, up about 30 percent through September, and Turkey, up more than 60 percent.
Put differently, people potentially deny themselves the benefits of greater diversification by buying a fund with such a narrow mandate, said Ashish Swarup, portfolio manager of the Fidelity Emerging Markets Discovery fund. And diversification matters more when investing in emerging markets, because their returns can whip up and down more than those of developed markets. “You want to buy the broadest portfolio of emerging markets that you can,” Mr. Swarup said. “That lowers your volatility.” His fund had investments in 17 countries at the end of August, with its largest stake in Taiwan.
The BRIC fund mash-up — volatile returns paired with a narrow niche — can also tempt nonprofessional investors into making self-defeating choices, said Fran M. Kinniry Jr., a principal in the Vanguard Investment Strategy Group. Behavioral research shows that investors tend to chase returns, buying high and selling low. That tendency is aggravated in riskier, racier corners of the market: people will see big returns one year and jump in, only to see an equally big loss the next year and bail out, he said.
Investors can also undercut themselves by confusing the economic advances of the BRIC countries with an investing rationale, said G. Rusty Johnson, a manager of the Harding Loevner Emerging Markets Advisor fund.
“G.D.P. doesn’t equate to stock market performance,” Mr. Johnson noted. Consider the trajectory of China, where the government still controls many publicly traded companies. “Their primary goal is not shareholder remuneration,” he said. “The companies have social agendas, and that keeps you from optimizing returns.”
Goldman Sachs, for its part, argues that both the economic and investing arguments in favor of the BRIC countries remain valid. “Each one of the BRICs has met or exceeded our expectations,” said Katie A. Koch, senior strategist at Goldman. “Some of them have been more successful than others, but the concept remains intact, and we continue to think these are four of the most important economies in the world.”
Mr. O’Neill devised his acronym in 2001, and his timing was as canny as his coinage was clever. The four countries boomed during the early part of the last decade — particularly China, which became the second-largest economy in the world. By 2011, all four were among the world’s top 10 economies, ranked by gross domestic product.
But lately, even Mr. O’Neill and Goldman have moved beyond his Big Four. His latest emerging-market terms are “MIST” and “N-11.” MIST stands for Mexico, Indonesia, South Korea and Turkey, and N-11 for the next 11 economies surging behind Brazil, Russia, India and China. (The MIST countries are a subset of the N-11.) Goldman judges the MIST countries as the most promising and developed of the N-11, all of which have young, swelling populations and other good conditions for economic growth, Ms. Koch said.
Thus, starting last year, Goldman began to offer an N-11 Equity fund to complement its BRIC fund. Ms. Koch said both funds could have roles in retail investors’ portfolios, either as someone’s full emerging-markets allocation or as an add-on, particularly for a person invested only in an emerging-markets index fund. That’s because the leading emerging-markets index, by MSCI, excludes Nigeria, Vietnam and Bangladesh — three countries that Goldman counts as promising.
“We’re saying that the default is suboptimal,” she said. “You have to ask which countries are really going to drive growth.”
But William S. Rocco, an analyst for Morningstar, advised caution when considering a BRIC fund or any narrowly targeted emerging-market offering. Investors who haven’t invested in emerging markets before should consider a broader offering, he said. “Generally, at Morningstar, we don’t like the idea of artificially limiting a manager’s choices,” he said.
And if they already own foreign or emerging-markets funds, they probably have exposure to the BRICs and several other emerging and frontier countries, he said. “Why would you want so much Brazil and China?” he asked. “You’re really doubling down.”