Begone BRIC: Block investing is ripe for demolition.
Investors should treat investments singularly not as groups
The state of investing in emerging markets is in rapid flux as global fund managers are on track to close more em funds this year than they will open for the first time since data started being tracked in 2006 by Lipper, a provider of fund data.
It is now clear that some of the products and investing strategies that the global asset management industry chose to attract retail investors are no longer working. Goldman
Sachs Group Inc., for example, recently closed its nine-year-old brIC (brazil, russia, India and China) fund and folded it into its broader emerging markets equity Fund.
The brIC concept is indicative of just how flawed some of the approaches to emerging-market investing have been. The acronym was coined by former Goldman Sachs economist Jim O’Neill in 2001. O’Neill chose to group the four countries — wildly different in their politics, economic compositions and cultures — because he saw them as the most important economies that would lead global economic growth in the coming years.
The acronym was certainly catchy — Goldman Sachs head Lloyd blankfein wanted to call it CrIb, but O’Neill felt that would be too condescending — and many retail investors got their first taste of emerging-markets investing through brIC funds.
but the fund would never live up to the economic promise that the countries themselves held. before Goldman Sachs folded it at the end of October, its value had plummeted more than 88 per cent.
Part of the problem is that the countries the fund invests in are so different and their economies are starkly diverging.
russia is struggling as its oilreliant economy has fallen into recession. brazil has seen financial instability as commodity prices collapse and it faces an ongoing political crisis at the federal level. India is on the rise as a new nationalistic government has brought in economic reforms and stoked optimism. And China is also undergoing a series of economic and financial reforms as the country’s leaders try to steer the economy into a so-called soft landing.
The brIC example should be a wake-up call to investors in emerging markets about the risks of treating them as a singular entity or grouping countries outside of the developed world into trendy investment plays, say fund managers.
“Part of the problem with investing in emerging markets may be the nomenclature — these are a lot of different countries that we have traditionally painted with a broad brush,” said michael Greenberg, portfolio manager at Franklin Templeton Solutions.
but another issue, and one that investors know all too well now, is that emerging markets have underperformed their developed-market counterparts for the past five years.
The mSCI emerging market Index, which tracks some of the largest companies in the emerging world, has declined 21.86 per cent since its near-term high earlier this year — firmly placing it in a bear market (defined as a decline of 20 per cent or more).
The bear market has resulted in trillions of dollars in lost wealth for investors, but it is also forcing the industry to be smarter about the ways they invest in emerging markets — which will hopefully benefit retail investors.
The recent wave of closed funds and failed strategies such as brICs can be traced back to 2013’s Taper Tantrum, when the bubble in emerging markets really burst and investors saw how hot plays such as Turkey and brazil had been overhyped.
The tantrum was the result of the u.S Federal reserve hinting at a may 2013 policy meeting that it was preparing to scale back its trillion-dollar quantitative-easing program — a program that had driven down u.S. borrowing costs and led to a flood of investors seeking out higher returns in riskier emerging markets.
Alex bellefleur, head of global macro strategy and research at Pavilion Global markets, said that one benefit of the resulting selloff was that it helped paint a clearer picture of which countries have better fundamentals.
bellefleur and the team at Pavilion Global markets say that in the coming year, one of the most important investment themes for ems will be realizing the differences between countries that still have policy flexibility to jumpstart their economies — such as mexico, South Korea and China — and those that have little ammunition left to fend off the effects of slowing global growth — like brazil, South Africa and Turkey.
but it is clear that the days of investing in emerging markets based on catchy phrases such as the brIC or the Next 11 (another one of O’Neill’s sayings to cover what are expected to be the fastest growing countries) should be behind most investors.
What investors should not give up on, Greenberg said, are emerging markets themselves.
“Just by nature, portfolio diversification means that not everything is going to be working at the same time. “When we look at markets out over the next seven years, for example, we do think that emerging markets are quite attractive.
“Given some strong fundamentals and now pretty reasonable valuations, depending on what markets you look at, some markets are pricing in some pretty bad news.”