What is “BRIC” and why should you care?

Apr 11, 2014   //   by Profitly   //   Profitly  //  Comments Off on What is “BRIC” and why should you care?

Over the past five years, the average return for the funds in the Investment Management Association’s Global Emerging Markets sector was 65.7 per cent. They underperformed the MSCI Emerging Markets Index, which rose by 69 per cent over the same period.

Nothing new here, you might well think – the average active manager underperforms the benchmark, often owning so many shares that the fund becomes a “closet index tracker”, replicating the performance of the index but with the added drag of fees and dealing costs. Far from being a surprise, underperformance is a near-certainty.

You could avoid it by investing in an index fund instead. Had you bought a fund that tracked the MSCI EM Index you would indeed have fared better over the past few years.

But you would still have done significantly worse than if you had bought a fund that tracks a developed-world benchmark; the FTSE 100 is up by 102 per cent and the S&P 500 by 124 per cent over the same period. Faced with this experience, it must be tempting for investors to conclude that the assumption of superior returns from emerging markets is just plain wrong.

But the peak of disappointment would be if you had bought into one of the most popular themes of emerging market investing over the past decade and put money into a Bric fund. The acronym Bric was coined by Jim O’Neill, then an economist at Goldman Sachs, in 2001 and stands for Brazil, Russia, India and China. It was supposed to identify the four economic powerhouses of the future, and plenty of passive and active products have been constructed and promoted around it.

Surely few EM investments can have performed better than a Bric fund? Wrong again. First off, in economics BRIC stands for the countries of Brazil, Russia, India and China.

Why group all of these countries together? Well, they are all deemed to be at a similar stage of newly advanced economic development. Jim O’Neill, an economist at Goldman Sachs, coined the term in a 2001 paper “Building Better Global Economic BRICs”. The thesis of his paper was that the economic potential of Brazil, Russia, India and China is such that they could become among the four most dominant economies by the year 2050. These four countries are among the biggest and fastest growing emerging markets, and the term has continued to be used as a symbol of the seeming shift in global economic power away from the developed G7 economies towards the developing world.

They have taken steps to increase their political cooperation, mainly as a way of influencing the United States position on major trade accords, or, through the implicit threat of political cooperation, as a way of extracting political concessions from the United States, such as the proposed nuclear cooperation with India.

The projections for the future of the BRIC countries has quite the variance, however. Some suggest that they might overtake the G7 economies by 2027. Goldman Sachs has argued that, although BRICs are seeing rapid development, we shouldn’t see their combined economies eclipsing the combined economies of the current richest countries in the world.

South Africa later joined the bloc despite economists at the Reuters 2011 Investment Outlook Summit dismissing the prospects of South African success . O’Neill actually told the summit that South Africa, at a population of under 50 million people, was just too small an economy to join the BRIC ranks. But after the BRIC countries formed a political organization among themselves, they later expanded to include South Africa, becoming the BRICS.  On June 16, 2009, the leaders of the BRIC countries held their first summit in Yekaterinburg. Since then they have met in Brasília in 2010, met in Sanya in 2011 and in New Delhi, India in 2012.

Following O’Neill’s report, the BRICs received increasing attention. The FTSE BRIC Index is below:

Year-on-Year Performance – Total Return
Index % (USD) 2009 2010 2011 2012 2013
FTSE BRIC 50 94.4 9.1 -19.5 12.7 -2.5
FTSE All-World BRIC 99.5 11.7 -22.9 14.0 -4.1
FTSE Emerging 82.6 19.8 -19.0 17.9 -3.5
FTSE All-World 36.2 13.2 -7.3 17.1 23.3

 

As you can see, their performance in 2009 was absolutely outstanding, especially compared to the Dow Jones Industrial Average, which returned 19% that year.  But when looking at the other years, it hasn’t done as well. And this has caused many to leave these funds focusing on BRICs behind.

Even though it looks like the BRICs will account for almost a third of the world economy by 2020, up from 20 percent now, applying the concept to equity investments has proved less rewarding. In indices, there are just certain companies in those countries that are in the fund, so you can’t just pick and choose which companies or sectors within those countries that you think will do well and buy them.

So let’s go back and look at some returns. From 2001 to 2007, MSCI’s BRIC index returned over 500 percent, which was a significant outperformance versus emerging markets. Then, over the past 10 years, MSCI’s BRIC index has returned 450 percent, according to Thomson Reuters. That is outstanding compared to 320 percent on emerging markets and 98 percent on developed markets. But when you start digging into the data, you realize that much of those gains came from early on in the cycle, just like the table above for the FTSE Indices.

Over the past five years, the MSCI BRIC Index is up just 44 percent, which is underperforming both emerging markets generally and developed markets such as the US and UK.

Obviously, this has taken a toll since 2001, with the funds’ asset base being nearly cut in half from the peak in 2007 to around 12 billion euros, according to data from Lipper. There were also outflows of $1.1 billion from the funds in 2012, extending last year’s $5.4 billion loss, according to EPFR Global.

Comparatively, broader emerging funds still have plenty of interest, taking in $18 billion this year.

So is this the time to buy? No one is saying for sure, but with disappointing economic reports continuing to come out of China, you may think about putting your money in something else.