Goldman’s ‘Next 11’ sinking faster than BRIC

NEW YORK/LONDON — This time last year, it looked like Goldman Sachs Group Inc.’s selection of emerging market upand-comers was ready to fill the void left by shrinking investment returns in Brazil, Russia, India and China (BRIC).

Share prices in these “Next 11” countries — places like the Philippines, Turkey and Mexico — were trading at all- time highs as foreign investors flooded their markets with cash. Inflows into Goldman Sachs’s US-domiciled Next 11 equity fund sent assets under management to twice the level of the firm’s BRICs counterpart.

Now, though, the Next 11 countries are looking even worse for investors than the larger markets they were supposed to supplant. MSCI Inc.’s Next 11 equity gauge has tumbled 19% this year, versus a 14% slump for the BRIC index.

Foreign capital is rushing out, with the Goldman Sachs fund shrinking by almost half as losses deepened to 11% since its inception four years ago.

The turnaround shows how young populations and a rising middle class — characteristics that first lured Goldman Sachs to the Next 11 economies a decade ago — have failed to safeguard stockmarket returns in a world facing higher US interest rates, tumbling commodity prices and a Chinese economic slowdown.

For John-Paul Smith, one of the few strategists to accurately predict the losses in emerging markets, it also illustrates the dangers of grouping so many disparate countries into a single investment theme.

Money managers “are increasingly moving away from acronym- based investment,” said Mr. Smith, the former Deutsche Bank AG strategist who founded Ecstrat, a London-based research firm, last year.

“Within emerging markets, it is difficult to think of a market that has a combination of attractive valuations and constructive policy developments.”

Katie Koch, a managing director at Goldman Sachs Asset Management, said that even with this year’s decline, the Next 11 fund’s return since its 2011 start still beat the MSCI Emerging Markets Index, which lost 16% during the period. “While we are certainly disappointed that the asset class headwinds have weighed on N-11, the fund has performed as designed by outperforming broad emerging markets through a full market cycle,” Ms. Koch said in a statement.

As investor pessimism spreads to the smaller developing economies, capital outflows are deepening. Exchange- traded funds that invest in emerging markets recorded withdrawals of $1.65 billion in the week ended Sept. 4, a 10th week of outflows.

Among the Next 11 markets, funds focused on South Korea and Mexico had the biggest losses. The group also includes Indonesia, Nigeria, Bangladesh, Egypt, Pakistan and Vietnam.

“There’s just a lot of negative sentiment,” said Geoffrey Dennis, the head of global emerging-market strategy at UBS Group AG in Boston. “There are not many emerging markets that stand out against it, whether it’s Next11 or BRIC. It sucks in every one.”

The Next 11 countries’ shared vulnerabilities have been exposed by China’s slowdown and heightened anticipation of a Federal Reserve interest-rate increase as soon as this month. Weaker Chinese growth has hurt demand for Korean and Bangladeshi exports, along with the commodities produced by Mexico, Indonesia and Nigeria.

Markets where foreign capital flows play an important role in driving investor sentiment — including Turkey and the Philippines — have slumped on fears international money managers will gravitate toward dollar assets as the Fed boosts rates.

For Alex Wolf, an economist at Standard Life Investments, countryspecific drivers of performance have become too important for investors to rely on groupings like the Next 11 to determine their holdings.

“There couldn’t be bigger differences between these countries: the growth model, outlook, the demographics and natural resources,” said Mr. Wolf.

“You have to look at each country individually.”

There are some bright spots. Vietnam’s benchmark VN Index has gained 4.9% this year, helped by rising exports and a government push to become an Asian manufacturing hub. Economic growth quickened to 6.4% in the second quarter from 6.1% during the previous three months.

As the effects of an unprecedented economic boom in China and three decades of declining interest rates in the US wear off, it’s no longer inevitable that less- developed countries will deliver attractive investment returns, according to Stephen Jen, the co-founder of London-based hedge fund SLJ Macro Partners LLP.

“Too much long-term money has been invested in this space that was based on simplistic logic related to population growth, and that poor countries must somehow become wealthier,” Mr. Jen, a former economist at the International Monetary Fund, said in a note on Aug. 31.

“There have been plenty of poor countries that stayed poor.” —