Why the BRIC fund is a long term investment?

BRIC has been a symbol of promising returns for investors, however, as the effects of the global crisis intensify, are BRIC funds still the stars among the many investment offerings?

Alfred Ming 05 May, 2009 | 0:00
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The term “BRIC”, for the grouping of Brazil, Russia, India and China, was introduced by Goldman Sachs in one of its research papers in 2003.

In less than 15 years, the BRIC economies collectively could account for an estimated half of the size of the G6 (the United States, Britain, Germany, Japan, Italy and France). By 2050, they are expected to be larger than all the G6 economies put together. Ever since the term was introduced, BRIC has been a symbol of promising returns for investors.

In Hong Kong, as in other markets worldwide, various funds focused on BRIC as their investment strategy have cropped up in recent years.

In p

ast years, the BRIC countries were supported by high growth rates. Between 2002 and 2007, the annual gross domestic product growth averaged 10.4 per cent in China, 7.9 per cent in India, 6.9 per cent in Russia and 3.7 per cent in Brazil.

When the advocates of decoupling have been proven wrong, and it is clear that the BRIC economies are not immune to the financial turmoil. As the effects of the global crisis intensify, are BRIC funds still the stars among the many investment offerings?

Recent performance varies
The MSCI BRIC Index has advanced 19 per cent this year while the MSCI Emerging Market Index has surged 13.7 per cent. In contrast, the MSCI World Index has retreated 5 per cent in the same period.

While the BRIC index has apparently outperformed the other two based on year-to-date returns, it should be noted that the former was hit the hardest last year, when the three indices posted losses of 59.3 per cent, 53.2 per cent and 40.3 per cent respectively.

While their growth potential and sustainability could be debatable, particularly in the current bear market, it is obvious that the BRIC economies are an integral part of the emerging markets, with their higher market volatility.

By March, the MSCI BRIC Index, MSCI Emerging Market Index and MSCI World Index respectively posted standard deviations (three-year) of 34.6 per cent, 30 per cent and 19 per cent.

Each BRIC country is having its own trait
While local investors are more familiar with the investment environment of the mainland, the economies of Brazil and Russia are more dependent on natural resources such as oils and minerals. Hence the BRIC funds that hold a larger stake in them would be more vulnerable to the volatility in the commodity markets.

India’s economy relies on the business services sector, which accounts for more than half of its GDP. That sector thrived on outsourcing from the developed world, where companies have increasing been forced to close or invest less, in the current recession.

So, in addition to overall emerging markets, it is crucial for investors to have a thorough understanding of every BRIC economy as these funds are having a significant stake in them.

BRIC funds could be classified as a smaller fund group within the emerging markets category. As BRIC economies are the biggest among the emerging markets, most typical emerging market funds have substantial weighting for BICRs. So BRIC funds are not the only way to gain exposure to BRIC markets.

Furthermore, BRIC funds have a relatively short history. Among the seven BRIC funds now available in Hong Kong, most date back about three years. So information on their track records is quite limited.

The idea of putting these four economies into a bouquet began solely for research purposes. Taken together, they do not constitute a guaranteed, or even a sensible, investment strategy.

BRIC economies, of course, share some similarity that may lead to increased interconnectedness among themselves.

But it is up to investors to decide how to use BRIC funds wisely – with suitable weightings in their portfolios in order to increase returns and diversify risk.

While mutual funds are not a vehicle for short-term investment, BRIC funds are very much a longer-term proposition. This is because their growth driver is based largely on the speculation that some day their economies will be among the largest in the world.

But this is unlikely to happen in the next two or three decades. Thus, an investor planning to retire in the next few years must think twice before buying a BRIC fund now.

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Alfred Ming  

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